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Business-Level Strategy

Corporate strategy is what makes the corporate whole add up to more than the sum of its business parts. The track record of corporate strategies had been dismal. A study of the diversification records of 33 large U.S. companies from 1950 to 1986 shows that diversification--whether through acquisition, joint venture, or start-up--generally has not brought the competitive advantages or profitability expected. Portfolio management, restructuring, transferring skills, and sharing activities are four concepts of corporate strategy that companies most commonly use. Portfolio management no longer works very well in the United States because of its highly developed capital market. Restructuring is merely a stopgap measure that will not build shareholder value over the long term because it usually produces an unwieldy conglomerate. Companies have the best chance of being successful at diversification if they capitalize on the existing relationships between business units by having them transfer skills and share activities.1

An organization's core competencies should be focused on satisfying customer needs or preferences in order to achieve above average returns. This is done through Business-level strategies. Business level strategies detail actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product or service markets. Business-level strategy is concerned with a firm's position in an industry, relative to competitors and to the five forces of competition. Customers are the foundation or essence of a organization's business-level strategies. Who will be served, what needs have to be met, and how those needs will be satisfied are determined by the senior management. Who are the customers? Demographic, geographic, lifestyle choices (tastes and values), personality traits, consumption patterns (usage rate and brand loyalty), industry characteristics, and organizational size. What are the goods and/or services that potential customers need? Knowing ones customers is very import in obtaining and sustaining a competitive advantage. Being able to successfully predict and satisfy future customer needs is important. (Perhaps one of Compaq's mistakes did not understand who their real customer was and what that customer -- end user -- wanted.)

How to satisfy customer needs? Organizations must determine how to bundle resources and capabilities to form core competencies and then use these core competencies to satisfy customer needs by implementing value-crating strategies.

Business-Level Strategies There are four generic strategies that are used to help organizations establish a competitive advantage over industry rivals. Firms may also choose to compete across a broad market or a focused market. We also briefly discuss a fifth business level strategy called an integrated strategy. 1. Cost Leadership Organizations compete for a wide customer based on price. Price is based on internal efficiency in order to have a margin that will sustain above average returns and cost to the customer so that customers will purchase your product/service. Works well when product/service is standardized, can have generic goods that are acceptable to many customers, and can offer the lowest price. Continuous efforts to lower costs relative to competitors is necessary in order to successfully be a cost leader. This can include:

Building state of art efficient facilities (may make it costly for competition to imitate) Maintain tight control over production and overhead costs Minimize cost of sales, R&D, and service.

Porter's 5 Forces Model Earlier we discussed Porter's Model. A cost leadership strategy may help to remain profitable even with: rivalry, new entrants, suppliers' power, substitute products, and buyers' power.

Rivalry Competitors are likely to avoid a price war, since the low cost firm will continue to earn profits after competitors compete away their profits (Airlines). Customers Powerful customers that force firms to produce goods/service at lower profits may exit the market rather than earn below average profits leaving the low cost organization in a monopoly positions. Buyers then loose much of their buying power. Suppliers Cost leaders are able to absorb greater price increases before it must raise price to customers. Entrants Low cost leaders create barriers to market entry through its continuous focus on efficiency and reducing costs. Substitutes Low cost leaders are more likely to lower costs to entice customers to stay with their product, invest to develop substitutes, purchase patents.

How to Obtain a Cost Advantage?

Determine and Control Cost Reconfigure the Value Chain as Needed


Technology Imitation Tunnel Vision

Value Chain A framework that firms can use to identify and evaluate the ways in which their resources and capabilities can add value. The value of the analysis lays in being able to break the organization's operations or activities into primary (such as operations, marketing & sales, and service) and support ( staff activities including human resources management & procurement) activities. Analyzing the firm's value-chain helps to assess your organizations to what you perceive your competitors value-chain, uncover ways to cut costs, and find ways add value to customer transactions that will provide a competitive advantage. 2. Differentiation - Value is provided to customers through unique features and characteristics of an organization's products rather than by the lowest price. This is done through high quality, features, high customer service, rapid product innovation, advanced technological features, image management, etc. (Some companies that follow this strategy: Rolex, Intel, Ralph Lauren)

Create Value by:

Lowering Buyers' Costs Higher quality means less breakdowns, quicker response to problems. Raising Buyers' Performance Buyer may improve performance, have higher level of enjoyment. Sustainability Creating barriers by perceptions of uniqueness and reputation, creating high switching costs through differentiation and uniqueness.

Risks of Using a Differentiation Strategy

Uniqueness Imitation Loss of Value

Porter's Five Forces Model Effective differentiators can remain profitable even when the five forces appear unattractive.

Rivalry Brand loyalty means that customers will be less sensitive to price increases, as long as the firm can satisfy the needs of its customers (audiofiles). Suppliers Because differentiators charge a premium price they can more afford to absorb higher costs and customers are willing to pay extra too. Entrants Loyalty provides a difficult barrier to overcome. Substitutes (trans. 4-26) Once again brand loyalty helps combat substitute products.

3. Focused Low Cost- Organizations not only compete on price, but also select a small segment of the market to provide goods and services to. For example a company that sells only to the U.S. government. 4. Focused Differentiation - Organizations not only compete based on differientation, but also select a small segment of the market to provide goods and services. Focused Strategies - Strategies that seek to serve the needs of a particular customer segment (e.g., federal government). Companies that use focused strategies may be able serve the smaller segment (e.g. business travelers) better than competitors who have a wider base of customers. This is especially true when special needs make it difficult for industry-wide competitors to serve the needs of this group of customers. By serving a segment that was previously poorly segmented an organization has unique capability to serve niche.

Risks of Using Focused Strategies:

Maybe out focused by competitors (even smaller segment) Segment may become of interest to broad market firm(s)

5. Using an Integrated Low-Cost/Differentiation Strategy This new strategy may become more popular as global competition increases. Firms that use this strategy may see improvement in their ability to:

Adaptability to environmental changes. Learn new skills and technologies More effectively leverage core competencies across business units and products lines which should enable the firm to produce produces with differentiated features at lower costs.

Thus the customer realizes value based both on product features and a low price. Southwest airlines is one example of a company that does uses this strategy. However, organizations that choose this strategy must be careful not to: becoming stuck in the middle i.e., not being able to manage successfully the five competitive forces and not achieve strategic competitiveness. Must be capable of consistently reducing costs while adding differentiated features.


Strategies that detail actions to gain a competitive advantage through the selection and management of a mix of businesses competing in several industries or product markets Developing and implementing multi-business strategies may be necessary for effective use of excess resources, capabilities and core competencies that have value across several businesses. To enhance strategic competitiveness, & earn above average returns. Primary approach to corporate level strategy: Diversification Firms diversify when they have excess resources, capabilities and core competencies that have multiple uses Levels of diversification Firms vary according to Relatedness Connections between and among business units Levels of diversification Low Medium High Low levels of diversification Single More than 95% of revenue comes from dominant business Dominant Between 70% & 95 % of sales in a single category eg Cadbury-Schweppes. Tend to be vertically integrated. Moderate Levels of Diversification Related-constrained diversification Less than 70% of revenue from dominant business and Businesses share product, technological and distribution linkages Related-linked diversification Less than 70% of revenue comes from dominant business Only limited links between businesses

High Levels of Diversification Unrelated diversification Less than 70% of revenue from dominant business No common links between businesses

Sharing Activities Sharing activities often lowers costs or raises differentiation Sharing activities can lower costs if it: Achieves economies of scale Boosts efficiency of utilisation Means more rapid movement through learning curve Sharing activities can enhance potential for or reduce the cost of differentiation Sharing activities must involve activities that are crucial to competitive advantage

Transferring Core Competencies Exploits interrelationships among divisions Starts with value chain analysis: Identify ability to transfer skills or expertise among similar value chains Exploit ability to share activities E.g. Two firms can share the same sales force, logistics network or distribution channels

Efficient Internal Capital Market Allocation Firms pursuing this strategy frequently diversify by acquisition: Acquire sound, attractive companies Acquire units that are autonomous Acquire corporation to supply needed capital Portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs Add professional management and control to sub-units Sub-unit managers compensation is based on unit results Restructuring Seek out undeveloped, sick or threatened organisations or industries Parent company (acquirer) intervenes and frequently: Changes sub-unit management team Shifts strategy

Infuses firm with new technology Enhances discipline by changing control systems Divests part of firm Makes additional acquisitions to achieve critical mass Unit will often be sold after one-time changes are made, since parent no longer adds value to ongoing operations

Merger Two firms agree to integrate operations on a relatively equal basis because they have resources and capabilities that create stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competency by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions and departments. The strategic issues at the functional level are related to business processes and the value chain. Functional level strategies in marketing, finance, operations, human resources, and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively. Functional units of an organization are involved in higher level strategies by providing input into the business unit level and corporate level strategy, such as providing information on resources and capabilities on which the higher level strategies can be based. Once the higherlevel strategy is developed, the functional units translate it into discrete action-plans that each department or division must accomplish for the strategy to succeed.

Functional strategy, as is suggested by the title, relates to a single functional operation and the activities involved therein. Decisions at this level within the organization are often described as tactical. Such decisions are guided and constrained by some overall strategic considerations. Functional strategy deals with relatively restricted plan providing objectives for specific function, allocation of resources among different operations within that functional area and coordi-nation between them for optimal contribution to the achievement of the SBU and corporate-level objectives. Below the functional-level strategy, there may be operations level strategies as each function may be dividend into several sub functions. For example, marketing strategy, a functional strategy, can be subdivided into promotion, sales, distribution, pricing strategies with each sub function strategy contributing to functional strategy.2

International Strategy

During the last half of the twentieth century, many barriers to international trade fell and a wave of firms began pursuing global strategies to gain a competitive advantage. However, some industries benefit more from globalization than do others, and some nations have a comparative advantage over other nations in certain industries. To create a successful global strategy, managers first must understand the nature of global industries and the dynamics of global competition.3 Sources of Competitive Advantage from a Global Strategy A well-designed global strategy can help a firm to gain a competitive advantage. This advantage can arise from the following sources:

Efficiency o Economies of scale from access to more customers and markets o Exploit another country's resources - labor, raw materials o Extend the product life cycle - older products can be sold in lesser developed countries o Operational flexibility - shift production as costs, exchange rates, etc. change over time Strategic o First mover advantage and only provider of a product to a market o Cross subsidization between countries o Transfer price Risk
o o

Diversify macroeconomic risks (business cycles not perfectly correlated among countries) Diversify operational risks (labor problems, earthquakes, wars)

Learning o Broaden learning opportunities due to diversity of operating environments Reputation o Crossover customers between markets - reputation and brand identification

Sources of Competitive Advantage Strategic Objectives

National Differences
Exploit factor cost differences Market or policy-induced changes

Scale Economies
Scale in each activity Balancing scale with strategic & operational risks

Scope Economies
Sharing investments and costs Portfolio diversification

Efficiency in Operations Flexibility

differences in Innovation and Societal management and Learning organization

Experience - cost Shared learning reduction and innovation across activities

Table 1.1


1. 2. 3.