Strategy

Strategic Actions: Business-Level

Strategy and the Industry Environment

Session 6
Business-Level Strategy
Our Book:
Strategic Management
(11th or 12th edition)
Author: Charles Hill
 Learning Objectives
• Explain the difference between low-cost and
differentiation strategies.
• Articulate how the attainment of a
differentiated or low-cost position can give a
company a competitive advantage.
• Explain how a company executes its business-
level strategy through function level strategies
and organizational arrangements.
• Describe what is meant by the term “value
innovation.”
• Discuss the concept of blue ocean strategy, and
explain how innovation in business-level
strategy can change the competitive game in an
industry, giving the innovator a sustained
competitive advantage.
Business-Level Strategy Choices

• We now have enough information to be able to identify the basic business-

level strategy choices that companies make. These basic choices are sometimes
called generic business-level strategy.

• Generic business-level strategy: A strategy that gives a company a specific

form of competitive position and advantage vis-à-vis its rivals that results in
above average profitability.
• Broad Low-Cost strategy: When a company lowers costs so that it can lower
prices and still make a profit.
• Broad Differentiation strategy: When a company differentiates its product in
some way, such as by recognizing different segments or offering different
products to each segment.
• Focus Low-Cost Strategy: When a company targets a certain segment or niche,
and tries to be the low-cost player in that niche.
• Focus Differentiation Strategy: When a company targets a certain segment or
niche, and customizes its offering to the needs of that particular segment
through the addition of features and functions.
• As noted, one cannot be Nordstrom and Wal-Mart, Timex and Rolex, Porsche
and Kia. Low cost and differentiation are very different ways of competing—
they require different functional strategies and different organizational
arrangements, so trying to do both at the same time may not work. On the
other hand, there are some important caveats to this argument.
Implementing Business-Level Strategy

This means that actions taken at the functional level should support the business-
level strategy, as should the organizational arrangements of the enterprise. There
must, in other words, be alignment or fit between business-level strategy,
functional strategy, and organization.
Competing Differently: Searching for a Blue Ocean

Their basic proposition is that many successful companies have built their
competitive advantage by redefining their product offering through value
innovation and, in essence, creating a new market space.
They describe the process of thinking through value innovation as searching for
the blue ocean—which they characterize as a wide open market space where a
company can chart its own course. Example: Southwest Airlines.
Competing Differently: Searching for a Blue Ocean

When thinking about how a company might redefine its market and craft a new
business-level strategy, Kim and Mauborgne suggest that managers ask
themselves the following questions:

1. Eliminate: Which factors that rivals take for granted in our industry can be
eliminated, thereby reducing costs?
2. Reduce: Which factors should be reduced well below the standard in our
industry, thereby lowering costs?
3. Raise: Which factors should be raised above the standard in our industry,
thereby increasing value?
4. Create: What factors can we create that rivals do not offer, thereby increasing
value?
Competing Differently: Searching for a Blue Ocean
Strategy in a Fragmented Industry

A fragmented industry is one composed of a large number of small- and

medium-sized companies. Examples of fragmented industries include the
dry-cleaning, hair salon, restaurant, health club, massage, and legal
services industries. There are several reasons that an industry may consist
of many small companies rather than a few large ones.
Strategy in a Fragmented Industry

Reasons for Fragmentation

First, a lack of scale economies may mean that there are few, if any, cost
advantages to large size. There are no obvious scale economies in landscaping and
massage services, for example, which helps explain why these industries remain
highly fragmented.

Second, brand loyalty in the industry may primarily be local. It may be difficult to
build a brand through differentiation that transcends a particular location or
region.

Third, the lack of scale economies and national brand loyalty implies low entry
barriers. When this is the case, a steady stream of new entrants may keep the
industry fragmented. Example: The Flower business
Strategy in a Fragmented Industry

Chaining and Franchising

In many fragmented industries that have been consolidated through value

innovation, the transforming company often starts with a single location, or just a
few locations. This was true for Staples, which started with a single store in
Boston, and Starbucks, which had just three stores when Howard Shultz took over
and started to transform the business. The key is to get the strategy right at the
first few locations, and then expand as rapidly as possible to build a national brand
and realize scale economies before rivals move into the market.
Strategy in a Fragmented Industry

Chaining and Franchising

Chaining involves opening additional locations that adhere to the same basic
formulae, and that the company owns. Thus, Staples pursued a chaining strategy
when it quickly opened additional stores after perfecting its formula at its original
Boston location. Today Staples has over 2,000 stores worldwide. Starbucks too has
pursued a chaining strategy, offering the same basic formula in every store that it
opens. Its store count now exceeds 18,000 in some 60 countries.
Strategy in a Fragmented Industry

Chaining and Franchising

Franchising is similar in many respects to chaining, except that in the case of

franchising the founding company—the franchisor—licenses the right to open and
operate a new location to another enterprise—franchisee—in return for a fee.
Typically, franchisees must adhere to some strict rules that require them to adopt
the same basic business model and operate in a certain way. Thus, a McDonald’s
franchisee has to have the same basic look, feel, offerings, pricing, and business
processes as other restaurants in the system, and has to report standardized
financial information to McDonald’s on a regular basis.
 Franchising

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 Franchising

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 Strategy in a Fragmented Industry

- Franchisor and the franchisee

- Master franchising
• Franchising is the cousin of Licensing
• The franchisor cedes the franchisee the right to use the business
concept and the franchiser´s brand in exchange for a royalty payment.
• The master franchising is the most used method. The franchiser
cedes a master franchise to a local entrepreneur, who will then
franchise it to within his territory.

• Ex: i Store is licensing. Opening an APPLE store would be franchising.

Fast food chains, education & health services, etc.

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 Strategy in a Fragmented Industry
Franchising
• Benefits:
– Overseas expansion with a
minimum investment
– Franchisees’ profits tied to
their efforts
– Availability of local
franchisees’ knowledge
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• Caveats:
– Revenues may not be adequate
– Availability of a master
franchisee
– Limited franchising
opportunities overseas
– Lack of control over the
franchisees’ operations
– Problem in performance
standards
– Cultural problems
– Physical proximity
 Starbuck´s Coffee Criteria in Selecting Partners

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2018 Franchise 500 Ranking
Strategy in a Fragmented Industry

Horizontal Mergers

Another way of consolidating a fragmented industry is to merge with or acquire

competitors, combining them together into a single larger enterprise that is able
to realize scale economies and build a more compelling national brand.

For now, it is worth noting that although mergers and acquisitions can help a
company to consolidate a fragmented industry, the road to success when pursuing
this strategy is littered with failures. Some acquiring companies pay too much for
the companies they purchase. Others find out after the acquisition that they have
bought a “lemon” that is nowhere as efficient as they thought prior to the
acquisition. Still others discover that the gains envisaged for an acquisition are
difficult to realize due to a clash between the culture of the acquiring and
acquired enterprises.
Acquisition
Merger
Greenfield
Strategies in Embryonic and Growth Industries

Choosing the strategies needed to succeed in such industries poses

special challenges because new groups of customers with different kinds
of needs start to enter the market. Managers must be aware of the way
competitive forces in embryonic and growth industries change over time
because they frequently need to build and develop new kinds of
competencies, and refine their business strategy, in order to effectively
compete in the future.

Most embryonic industries emerge when a technological innovation

creates a new product opportunity. For example, in 1975, the personal
computer (PC) industry was born after Intel developed the
microprocessor technology that allowed companies to build the world’s
first PCs; this spawned the growth of the PC software industry that took
off after Microsoft developed an operating system for IBM.
Strategies in Embryonic and Growth Industries

The Changing Nature of Market Demand

Managers who understand how the demand for a product is affected by

the changing needs of customers can focus on developing new strategies
that will protect and strengthen their competitive position, such as
building competencies to lower production costs or speed product
development.
Strategies in Embryonic and Growth Industries
Strategic Implications: Crossing the Chasm

Why are pioneering companies often unable to create a business model that
allows them to be successful over time and remain as market leaders?
Innovators and early adopters have very different customer needs from the
early majority.

New strategies are often required to strengthen a company’s business

model as a market develops over time for the following reasons:

1. Innovators and early adopters are technologically sophisticated

customers willing to tolerate the limitations of the product. The early
majority, however, value ease of use and reliability.
2. Innovators and early adopters are typically reached through specialized
distribution channels, and products are often sold by word of mouth.
Reaching the early majority requires mass-market distribution channels
and mass-media advertising campaigns that require a different set of
marketing and sales strategies.
Strategies in Embryonic and Growth Industries
Strategic Implications: Crossing the Chasm

3. Because innovators and the early majority are relatively few in number
and are not particularly price sensitive, companies serving them typically
pursue a focus model, produce small quantities of a product, and price high.
To serve the rapidly growing mass-market, large-scale mass production may
be critical to ensure that a high-quality product can be reliably produced at a
low price point.

The implication is clear: to cross the chasm successfully, managers must

correctly identify the customer needs of the first wave of early majority
users—the leading edge of the mass market. Then they must adjust their
business models by developing new strategies to redesign products and
create distribution channels and marketing campaigns to satisfy the needs of
the early majority.
Mobile Business Industry
Strategies in Embryonic and Growth Industries
Strategies to Deter Entry

In mature industries successful enterprises have normally gained substantial

economies of scale and established strong brand loyalty.

However, there may be cases in which scale and brand, although significant, are not
sufficient to deter entry. In such circumstances there are other strategies that
companies can pursue to make new entry less likely. These strategies include product
proliferation, limit pricing, and strategic commitments.
Strategies in Embryonic and Growth Industries
Strategies to Deter Entry

1. Product Proliferation
One way in which companies try to enter a mature industry is by
looking for market segments or niches that are poorly served by incumbent
enterprises. The entry strategy involves entering these segments, gaining experience,
scale and brand in that segment, and then progressively moving upmarket. This is
how Japanese automobile companies first entered the U.S. market in the late 1970s
and early 1980s.

A product proliferation strategy involves incumbent companies attempting to

forestall entry by making sure that every niche or segment in the marketplace is well
served.
Strategy in Mature Industries

A mature industry is commonly dominated by a small number of large

companies. Although a mature industry may also contain many medium-
sized companies and a host of small, specialized companies, the large
companies often determine the nature of competition in the industry
because they can influence the six competitive forces.