Chapter 5

Business-Level Strategy

Robert E. Hoskisson Michael A. Hitt R. Duane Ireland

2004 by South-Western/Thomson Learning
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The Strategic Management Process

Strategic Thinking
Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership

Strategic Analysis

Chapter 3 The External Environment

Chapter 4 The Internal Organization

Strategic Intent Strategic Mission

Creating Competitive Advantage

Chapter 5 Business-Level Strategy Chapter 8 Acquisition and Restructuring Strategies

Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 9 International Strategy

Chapter 7 Corporate-Level Strategy

Chapter 10 Cooperative Strategy

Monitoring And Creating Entrepreneurial Opportunities

Chapter 11 Corporate Governance

Chapter 12 Strategic Entrepreneurship 2

Core Competencies and Strategy

Core competencies The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage

Strategy

Business-level strategy

Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets 3

Business-Level Strategy
Intended to create differences between the firms position relative to those of its rivals In selecting a business-level strategy, a firm determines:

who will be served what needs those target customers have that it will satisfy how those needs will be satisfied
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Who Will be Served

Market segmentation (see Table 5.1)

Consumer Markets

Customers

Industrial Markets

What Needs to Satisfy

Create

value for customers. 2 generalized forms of value:

Low cost products with acceptable features Highly differentiated product features with acceptable cost

Value

for industrial customers includes being a source of the customers competitive advantage
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Types of Business-Level Strategies

To position itself, the firm must decide whether it intends to:

perform activities differently (to achieve lower cost), or to perform different activities as compared to its rivals (to differentiate products and command a premium price exceeding the marginal cost of differentiation)
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Five Generic Strategies

Competitive Advantage
Cost Uniqueness Differentiation Cost Leadership

Competitive Scope

Broad target

Integrated Cost Leadership/ Differentiation Narrow target

Focused Cost Leadership

Focused Differentiation

Cost Leadership Strategy

An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers relatively standardized products features acceptable to many customers lowest competitive price

Cost Leadership Strategy

Cost saving actions required by this strategy: building efficient scale facilities tightly controlling production costs and overhead minimizing costs of sales, R&D and service building efficient manufacturing facilities monitoring costs of activities provided by outsiders simplifying production processes
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Cost Leadership Strategy and the Five Forces of Competition

Rivalry Among Competing Firms
Five Forces of Competition
Bargaining Power of Suppliers

Can use cost leadership strategy to advantage since: competitors avoid price wars with cost leaders, creating higher profits for the entire industry

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Cost Leadership Strategy and the Five Forces of Competition

Bargaining Power of Buyers
Five Forces of Competition
Bargaining Power of Suppliers

Can mitigate buyers power by: driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm

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Cost Leadership Strategy and the Five Forces of Competition

Bargaining Power of Suppliers
Five Forces of Competition
Bargaining Power of Suppliers

Can mitigate suppliers power by: being able to absorb cost increases due to low cost position being able to make very large purchases, reducing chance of supplier using power
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Cost Leadership Strategy and the Five Forces of Competition

Threat of New Entrants
Five Forces of Competition
Bargaining Power of Suppliers

Can frighten off new entrants due to: their need to enter on a large scale in order to be cost competitive the time it takes to move down the learning curve

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Cost Leadership Strategy and the Five Forces of Competition

Threat of Substitute Products
Five Forces of Competition
Bargaining Power of Suppliers

Cost leader is well positioned to lower prices in order to maintain value position

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Strategy and Structure

Organization structure specifies a firms formal reporting relationships, procedures, controls, and authority and decision-making processes 3 structural characteristics:
Specialization (type and number of jobs required to complete work) Centralization (decision-making authority) Formalization (rules and procedure)
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Structure for Cost Leadership Strategy

Operations is main function Process engineering is
emphasized over R&D Large centralized staff Formalized procedures Structure is mechanical, job roles highly structured

Office of the President

Centralized Staff

Engineering

Operations

Accounting Personnel
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Marketing

Risks of Cost Leadership Strategy

Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors innovations Too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers perceptions of competitive levels of differentiation Competitors may learn how to successfully imitate the cost leaders strategy
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Differentiation Strategy
An 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
nonstandardized products customers value differentiated features more than they value low cost
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Differentiation Strategy

Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity

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Differentiation Strategy
Differentiation actions required by this strategy:
developing new systems and processes shaping perceptions through advertising quality focus capability in R&D maximize human resource contributions through low turnover and high motivation
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Differentiation Strategy and the Five Forces of Competition

Rivalry Among Competing Firms
Five Forces of Competition
Bargaining Power of Suppliers

Can defend against competition because: brand loyalty to differentiated product offsets price competition

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Differentiation Strategy and the Five Forces of Competition

Bargaining Power of Buyers
Five Forces of Competition
Bargaining Power of Suppliers

Can mitigate buyer power because: well differentiated products reduce customer sensitivity to price increases

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Differentiation Strategy and the Five Forces of Competition

Bargaining Power of Suppliers
Five Forces of Competition
Bargaining Power of Suppliers

Can mitigate suppliers power by: absorbing price increases due to higher margins passing along higher supplier prices because buyers are loyal to differentiated brand
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Differentiation Strategy and the Five Forces of Competition

Threat of New Entrants
Five Forces of Competition
Bargaining Power of Suppliers

Can defend against new entrants because: new products must surpass proven products or, new products must be at least equal to performance of proven products, but offered at lower prices
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Differentiation Strategy and the Five Forces of Competition

Threat of Substitute Products
Five Forces of Competition
Bargaining Power of Suppliers

Well positioned relative to substitutes because: brand loyalty to a differentiated product tends to reduce customers testing of new products or switching brands
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Structure for Differentiation Strategy

President and Limited Staff R&D New Product R&D Operations Marketing

Marketing
Finance

Human Resources

Marketing is the main function for tracking new product ideas New product R&D is emphasized Most functions are decentralized Formalization is limited to foster change and promote new ideas Overall structure is organic; job roles are less structured

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Major Risks of Differentiation Strategy

Customers may decide that the price differential between the differentiated product and the cost leaders product is too large Means of differentiation may cease to provide value for which customers are willing to pay

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Major Risks of Differentiation Strategy

Experience may narrow customers perceptions of the value of differentiated features of the firms products Makers of counterfeit goods may attempt to replicate differentiated features of the firms products

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Focused Business-Level Strategies

A focus strategy must exploit a narrow targets differences from the balance of the industry by: isolating a particular buyer group isolating a unique segment of a product line concentrating on a particular geographic market
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Factors That May Drive Focused Strategies

Large firms may overlook small niches Firm may lack resources to compete in the broader market May be able to serve a narrow market segment more effectively than can larger industry-wide competitors

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Structure for Focused Strategies

A

simple structure for smaller firms

Owner-manager makes all major decisions and monitors all activities

functional structure for larger firms

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Major Risks of Focused Strategies

Firm may be outfocused by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market

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Benefits of Integrated Strategy

Successful firms using this strategy have above-average returns Firm offers two types of values to customers some differentiated features (but less than a true differentiated firm) relatively low cost (but not as low as the cost leaders price)
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Using the Functional Structure

The integrated form of the functional structure

must have decision-making patterns that are partially centralized and partially decentralized will have semi-specialized jobs and rules and procedures that call for some formal and some informal job behavior

Strategic flexibility is obtained via

flexible manufacturing systems information networks total quality management systems

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Major Risks of Integrated Strategy

An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) The firm may become stuck in the middle lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy
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