Business level strategy

MGMT 619Prof. Sanjay Jain

Where we are...

External Analysis Internal Analysis

Competitive Positioning(Business-level strategy formulation)

Business level strategy

Actions taken to provide value to

customers and gain a competitive advantage (playing offense and defense)

How should we compete effectively in the businesses that we are in?

The Distribution of Economic Contribution between a Firm & a Buyer

Buyer’sBuyer’sSurplusSurplus

Firm’sFirm’sSurplus Surplus or or ProfitProfit

CostCost

PricePrice

ValueValue

A Firm’s TotalA Firm’s TotalEconomicEconomicContributionContribution

• Value = Willingness to Pay = price a buyer is willing to pay Value = Willingness to Pay = price a buyer is willing to pay in the absence of a competing product and in the context of in the absence of a competing product and in the context of other purchasing opportunities.other purchasing opportunities. The buyer always determines a product’s value.The buyer always determines a product’s value.

• Buyer’s surplus = Product’s Value to the Buyer - Market Buyer’s surplus = Product’s Value to the Buyer - Market PricePrice• Firm’s surplus = Market Price - Unit CostFirm’s surplus = Market Price - Unit Cost

In competitive markets, buyers capture part of the overall economic contribution a firmproduces.

Value drivers

Technology Quality Service Customization Brand/Reputation Complements Delivery

Cost Drivers

Economies of scale Economies of scope Learning Curve Low input costs Organizational practices Vertical integration

SupportActivities

Primary Activities

Value Chain AnalysisValue Chain Analysis

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

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Isolating mechanisms

Property rights Dedicated assets Causal ambiguity (organization

specific practices) Switching costs

Creating new market space

• Typically in an industry, strategies tend to converge along the same basic dimensions of competition

• Creating new market space involves identifying unoccupied territory that represents a real breakthrough in value(capturing the “best of both worlds”)

Creating new market space

Old MarketOld MarketOld

Market

New Market Space

From Head-to-head competition to creating new From Head-to-head competition to creating new market spacemarket space

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Four actions framework: The value curve

ReduceWhat factors should be reduced well below the industry standard?

Raise

What factors should be raised well above the industry standard?

The key to discovering a new value curve lies in answering four basic questions

Source:Adapted from W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,”

Creating new markets:A new value curve

Creating new markets:A new value curve

Eliminate

What factors that the industry has taken for granted should be eliminated?

Create/Add

What factors that the industry has never offered should be created or added?

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Conventional vs. new market creation strategic mindsets

Strategic group and industry segments

Industry

Buyers

Business model

Time

Product and service offerings

Emphasizes competitive position within group and segments

Emphasizes rivalry

Emphasizes better buyer service

Emphasizes efficient operation of the model

Emphasizes adaptation and capabilities that support competitive retaliation

Emphasizes product or service value and offerings within industry definition

Dimensions of competition Head-to-Head competition New-market creation

Looks across groups and segments

Emphasizes substitutes across industries

Emphasizes redefinition of the buyer and buyer’s preferences

Emphasizes rethinking of the industry business model

Emphasizes strategic intent-seeking to shape the external environment over time

Emphasizes complementary products and services within and across industries

Creating shared value

Companies are trapped in a narrow vision of value creation

- optimize short term financial performance

- ignore broader influences of long-term success

Assumed tradeoff between economic efficiency and social progress (Friedman view)

Creating shared value

Reconceiving products and services

Redefining productivity in the value chain

Enabling local cluster development

Create a Win-Win for Business and Society

Choose which social issues to address

Create a social dimension to the company’s value proposition

Orchestrate heightened forms of collaboration

A more sophisticated form of capitalism

Take-away points

Competitive positioning as a synthesis of external/internal analysis; provides an economic logic for organizing firm activities

Creating new market-spaces (positions)

Creating shared value (economic and social positions)