Chapter 5Chapter 5

Business-level StrategiesBusiness-level Strategies

Chapter 5Chapter 5

Business-level StrategiesBusiness-level Strategies

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Learning ObjectivesLearning Objectives

To understand:

• generic competitive strategies and the way they are executed

• the elements of a business model

• how competitive dynamics influence industries and the companies they contain

• the most common competitive tactics

• strategies in an international context and over time

To understand:

• generic competitive strategies and the way they are executed

• the elements of a business model

• how competitive dynamics influence industries and the companies they contain

• the most common competitive tactics

• strategies in an international context and over time

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StrategicStrategicDirectionDirection

Strategy FormulationStrategy Formulation(corporate and (corporate and business level)business level)

Strategy ImplementationStrategy Implementationand Controland Control

Strategic RestructuringStrategic Restructuring

External and Internal External and Internal AnalysisAnalysis

Strategic Management ProcessStrategic Management Process

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Business-Level Strategy Formulation Responsibilities

Business-Level Strategy Formulation Responsibilities

• Direction setting—Mission, vision, ethics, goals

• Situation analysis—Compilation and assessment of information

• Selection of strategies—Generic strategy (cost leadership, differentiation, best cost, focus) and competitive tactics, including growth strategy

• Management of resources—Acquisition and/or development of resources leading to competitive advantage

• Direction setting—Mission, vision, ethics, goals

• Situation analysis—Compilation and assessment of information

• Selection of strategies—Generic strategy (cost leadership, differentiation, best cost, focus) and competitive tactics, including growth strategy

• Management of resources—Acquisition and/or development of resources leading to competitive advantage

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Business-Level StrategiesBusiness-Level Strategies

• Generic Strategies - how the firm intends to position itself to create value for its customers in ways that are different from those of competitors

• Competitive Tactics - the competitive actions firms take to grow and increase the strength of or protect their competitive positions.

• Generic Strategies - how the firm intends to position itself to create value for its customers in ways that are different from those of competitors

• Competitive Tactics - the competitive actions firms take to grow and increase the strength of or protect their competitive positions.

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Generic StrategiesGeneric Strategies

Value propositions associated with generic competitive strategies

Differentiation: Offer value to customers by providing them with a preferred product or service

Low-cost leadership: Offer value to customers by providing them with a standard product or service produced at lower cost (and typically offered at a lower price)

Best cost: A combination of the first two options.

Note: these strategies assume that the firm is seeking a broad customer base. If the firm is pursuing a particular market segment it is using a “focus” strategy.

Value propositions associated with generic competitive strategies

Differentiation: Offer value to customers by providing them with a preferred product or service

Low-cost leadership: Offer value to customers by providing them with a standard product or service produced at lower cost (and typically offered at a lower price)

Best cost: A combination of the first two options.

Note: these strategies assume that the firm is seeking a broad customer base. If the firm is pursuing a particular market segment it is using a “focus” strategy.

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Create value through some type of uniqueness, such as:• Product innovations• Superior quality or service• Creative advertising• Speed and Flexibility• Reputation and Brand Name

Customers must be willing to pay more for the uniqueness• Added costs vs. incremental price

Create value through some type of uniqueness, such as:• Product innovations• Superior quality or service• Creative advertising• Speed and Flexibility• Reputation and Brand Name

Customers must be willing to pay more for the uniqueness• Added costs vs. incremental price

DifferentiationDifferentiation

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Low-Cost LeadershipLow-Cost Leadership

Common ways to pursue low-cost leadership:

•Accurate demand forecasting and high capacity utilization

•Economies of scale

•Technological advances

•Experience effects

Common ways to pursue low-cost leadership:

•Accurate demand forecasting and high capacity utilization

•Economies of scale

•Technological advances

•Experience effects

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Typical Experience CurveTypical Experience Curve

unitcostunitcost

total cumulative outputtotal cumulative output

1010

• Combination of low-cost leadership and differentiation

• The reasons it works:The same resources/activities that allow cost

reductions may also allow differentiation. (e.g., automation that lowers costs and improves speed and service)

Profits from cost reductions may be used to invest in differentiating features, and vice versa

• Combination of low-cost leadership and differentiation

• The reasons it works:The same resources/activities that allow cost

reductions may also allow differentiation. (e.g., automation that lowers costs and improves speed and service)

Profits from cost reductions may be used to invest in differentiating features, and vice versa

Best CostBest Cost

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• The firm serves the needs of a particular market segment

• In combination with one of the other three generic strategies:

focus through differentiationfocus through low-cost leadershipfocus through best cost

• The firm serves the needs of a particular market segment

• In combination with one of the other three generic strategies:

focus through differentiationfocus through low-cost leadershipfocus through best cost

FocusFocus

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Business ModelsBusiness ModelsBusiness ModelsBusiness Models

• Important elements:Important elements:� Identifying market segments to be targetedIdentifying market segments to be targeted

� Determining unique sources of value for customers Determining unique sources of value for customers (differentiating features, low cost, or a balance)(differentiating features, low cost, or a balance)

� Selecting unique features and technologies for productsSelecting unique features and technologies for products

� Determining how to capture value, incl. pricingDetermining how to capture value, incl. pricing

� Verifying sufficient demand existsVerifying sufficient demand exists

• Decisions regarding assets:Decisions regarding assets:� Types of assets sold (physical, service, financial, intangible)Types of assets sold (physical, service, financial, intangible)

� Rights given to consumers (complete transfer, distribution, Rights given to consumers (complete transfer, distribution, temporary use, fee for matching buyers/sellers)temporary use, fee for matching buyers/sellers)

• Important elements:Important elements:� Identifying market segments to be targetedIdentifying market segments to be targeted

� Determining unique sources of value for customers Determining unique sources of value for customers (differentiating features, low cost, or a balance)(differentiating features, low cost, or a balance)

� Selecting unique features and technologies for productsSelecting unique features and technologies for products

� Determining how to capture value, incl. pricingDetermining how to capture value, incl. pricing

� Verifying sufficient demand existsVerifying sufficient demand exists

• Decisions regarding assets:Decisions regarding assets:� Types of assets sold (physical, service, financial, intangible)Types of assets sold (physical, service, financial, intangible)

� Rights given to consumers (complete transfer, distribution, Rights given to consumers (complete transfer, distribution, temporary use, fee for matching buyers/sellers)temporary use, fee for matching buyers/sellers)

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Defining a Business ModelDefining a Business Model

Market segmentstargeted:•Broad market•Focus on a particular market segment or segments

Market(s)Assets sold:•Physical products•Services•Financial assets•Intangible assets

Rights to assetsprovided:•Complete transfer•Distribution of assets created by others•Rights to use assets for a time•Broker (match buyers & sellers)

AssetsUnique sources of value:•Differentiation: unique features and technologies embedded in assets•Low cost: Basic products/services or assets at a low price•Best cost: high value to cost ratio

Value CreationDetermination of approach for capturing revenues and profits (financial feasibility)

Determination of demand for products, services, or other assets as defined and at a particular price

Value Capture

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Competitive TacticsCompetitive Tactics

• Internal Growth StrategiesInternal Growth Strategies� Market penetrationMarket penetration

� Market developmentMarket development

� Product/service developmentProduct/service development

� Vertical integrationVertical integration

• External Growth StrategiesExternal Growth Strategies� Alliances/joint venturesAlliances/joint ventures

� AcquisitionsAcquisitions

� Horizontal integrationHorizontal integration

• Internal Growth StrategiesInternal Growth Strategies� Market penetrationMarket penetration

� Market developmentMarket development

� Product/service developmentProduct/service development

� Vertical integrationVertical integration

• External Growth StrategiesExternal Growth Strategies� Alliances/joint venturesAlliances/joint ventures

� AcquisitionsAcquisitions

� Horizontal integrationHorizontal integration

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Competitive TacticsCompetitive Tactics

• Offensive TacticsOffensive Tactics� Aggressive CompetitionAggressive Competition

� First-Mover AdvantagesFirst-Mover Advantages

• Defensive TacticsDefensive Tactics� Threat of RetaliationThreat of Retaliation

� Barriers to ImitationBarriers to Imitation

• Collaborative TacticsCollaborative Tactics

• Political TacticsPolitical Tactics

• Avoidance (Blue Ocean) TacticsAvoidance (Blue Ocean) Tactics

• Strategic FlexibilityStrategic Flexibility

• Offensive TacticsOffensive Tactics� Aggressive CompetitionAggressive Competition

� First-Mover AdvantagesFirst-Mover Advantages

• Defensive TacticsDefensive Tactics� Threat of RetaliationThreat of Retaliation

� Barriers to ImitationBarriers to Imitation

• Collaborative TacticsCollaborative Tactics

• Political TacticsPolitical Tactics

• Avoidance (Blue Ocean) TacticsAvoidance (Blue Ocean) Tactics

• Strategic FlexibilityStrategic Flexibility

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International Growth TacticsInternational Growth Tactics

• Exporting

• Licensing

• Franchising

• Joint Venture

• Greenfield Venture

• Exporting

• Licensing

• Franchising

• Joint Venture

• Greenfield Venture

Note: Moving down the list entails not only greater cost and Note: Moving down the list entails not only greater cost and

financial risk, but also greater profit potential and controlfinancial risk, but also greater profit potential and control

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Approach to International MarketsApproach to International Markets

• Multidomestic – custom tailoring products/services for individual international markets

• Global – one product/service for the world

• Transnational – a hybrid approach

• Multidomestic – custom tailoring products/services for individual international markets

• Global – one product/service for the world

• Transnational – a hybrid approach

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The Industry Life CycleThe Industry Life Cycle

AA

BB

CC

IntroductionIntroduction

GrowthGrowth

MaturityMaturity

Commodity or Decline

Commodity or Decline

TimeTime

Unit Sales

Volume

Unit Sales

Volume