CHAPTER 4

STRATEGIC ACTIONS: STRATEGY FORMULATION

Strategy at the Business Level

Strategic Management Management of Strategy
Competitiveness and Globalization: Concepts Seventh Concepts and Cases and Casesedition
Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

PowerPoint Presentation by Charlie Cook The University of West Alabama © 2007 Thomson/South-Western. All rights reserved.

KNOWLEDGE OBJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to:

1. Define business-level strategy. 2. Discuss the relationship between customers and business-level strategies in terms of who, what, and how. 3. Explain the differences among business-level strategies. 4. Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy. 5. Describe the risks of using each of the business-level strategies.
© 2007 Thomson/South-Western. All rights reserved. 4–2

Business-Level Strategy (Defined)
• An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets.

© 2007 Thomson/South-Western. All rights reserved.

4–3

Core Competencies and Strategy
Core Competencies Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals

Strategy

An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage

Business-level Strategy

Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

© 2007 Thomson/South-Western. All rights reserved.

4–4

All rights reserved. 4–5 .Customers: Their Relationship to BusinessLevel Strategies Who will be served? Key Issues in Business-level Strategy What needs will be satisfied? How will those needs be satisfied? © 2007 Thomson/South-Western.

 Reach: firm’s success and connection to customers  Richness: depth and detail of two-way flow of information between the firm and the customer  Affiliation: facilitation of useful interactions with customers © 2007 Thomson/South-Western. 4–6 . All rights reserved.Effectively Managing Relationships with Customers • Firms must manage all aspects of their relationship with customers.

All rights reserved. All Customers Consumer Markets Industrial Markets © 2007 Thomson/South-Western.Who: Determining the Customers to Serve • Market segmentation  A process used to cluster people with similar needs into individual and identifiable groups. 4–7 .

Market Segmentation • Consumer Markets  Demographic factors  Socioeconomic factors  Geographic factors • Industrial Markets  End-use segments  Product segments  Geographic segments  Psychological factors  Consumption patterns  Perceptual factors  Common buying factor segments  Customer size segments © 2007 Thomson/South-Western. All rights reserved. 4–8 .

and national differences) • Psychological factors (lifestyle. income. 120.) • Socioeconomic factors (social class. C. Cincinnati: South-Western College Publishing.TABLE 4. perceptual mapping) Industrial Markets • • • • • End-use segments (identified by SIC code) Product segments (based on technological differences or production economics) Geographic segments (defined by boundaries between countries or by regional differences within them) Common buying factor segments (cut across product market and geographic segments) Customer size segments Source: Adapted from S.1 Basis for Customer Segmentation Consumer Markets • Demographic factors (age. All rights reserved. sex. moderate. 2000. etc. Jain. 4–9 © 2007 Thomson/South-Western. Marketing Planning and Strategy. regional. and light users) • Perceptual factors (benefit segmentation. personality traits) • Consumption patterns (heavy. stage in the family life cycle) • Geographic factors (cultural. .

All rights reserved. © 2007 Thomson/South-Western. • Customer needs are neither right nor wrong. good nor bad. 4–10 . • Customer needs represent desires in terms of features and performance capabilities.What: Determining Which Customer Needs to Satisfy • Customer needs are related to a product’s benefits and features.

All rights reserved. innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time. • Only firms with capacity to continuously improve.How: Determining Core Competencies Necessary to Satisfy Customer Needs • Firms use core competencies to implement value creating strategies that satisfy customers’ needs. 4–11 . © 2007 Thomson/South-Western.

The Purpose of a Business-Level Strategy • Business-Level Strategies  Are intended to create differences between the firm’s position relative to those of its rivals. 4–12 . © 2007 Thomson/South-Western. • To position itself. the firm must decide whether it intends to:  Perform activities differently or  Perform different activities as compared to its rivals. All rights reserved.

© 2007 Thomson/South-Western.Types of Potential Competitive Advantage • Achieving lower overall costs than rivals  Performing activities differently (reducing process costs) • Possessing the capability to differentiate the firm’s product or service and command a premium price  Performing different (more highly valued) activities. 4–13 . All rights reserved.

All rights reserved.FIGURE 4.1 The External Environment © 2007 Thomson/South-Western. 4–14 .

4–15 .Competitive Scope • Broad Scope  The firm competes in many customer segments. All rights reserved. • Narrow Scope  The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others. © 2007 Thomson/South-Western.

All rights reserved.Types of Business-Level Strategies Competitive Advantage Cost Uniqueness Broad Target Cost Leadership Differentiation Competitive Scope Narrow Target Integrated Cost Leadership/ Differentiation Focused Cost Leadership Focused Differentiation © 2007 Thomson/South-Western. 4–16 .

by Michael E. 4–17 . from Competitive Advantage: Creating and Sustaining Superior Performance. © 2007 Thomson/South-Western. Porter. Porter. All rights reserved.FIGURE 4.2 Five Business-Level Strategies Source: Adapted with the permission of The Free Press. an imprint of Simon & Schuster Adult Publishing Group. 12. Copyright © 1985. 1998 by Michael E.

relative to that of competitors with features that are acceptable to customers.Cost Leadership Strategy • An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost. All rights reserved. 4–18 .  Relatively standardized products  Features acceptable to many customers  Lowest competitive price © 2007 Thomson/South-Western.

All rights reserved. 4–19 .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 © 2007 Thomson/South-Western.

All rights reserved.  Backward integration  Change location relative to suppliers or buyers 4–20 .How to Obtain a Cost Advantage Determine and control Cost Drivers Reconfigure Value Chain if needed  Alter production process  Change in automation  New raw material  Forward integration  New distribution channel  New advertising media  Direct sales in place of indirect sales © 2007 Thomson/South-Western.

© 2007 Thomson/South-Western. 4–21 . 1998 by Michael E. Copyright © 1985. All rights reserved.3 Examples of Value-Creating Activities Associated with the Cost Leadership Strategy SOURCE: Adapted with the permission of The Free Press. Porter. an imprint of Simon & Schuster Adult Publishing Group.FIGURE 4. from Competitive Advantage: Creating and Sustaining Superior Performance. 47. by Michael E. Porter.

Value-Creating Activities for Cost Leadership • Cost-effective MIS • Few management layers • Simplified planning • Consistent policies • Effecting training • Easy-to-use manufacturing technologies • Investments in technologies • Finding low cost raw materials • Monitor suppliers’ performances • Link suppliers’ products to production processes • Economies of scale • Efficient-scale facilities • Effective delivery schedules • Low-cost transportation • Highly trained sales force • Proper pricing © 2007 Thomson/South-Western. 4–22 . All rights reserved.

Cost Leadership Strategy: Competitors Rivalry with Existing Competitors Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Due to cost leader’s advantageous position:  Rivals hesitate to compete on basis of price. Bargaining power of buyers © 2007 Thomson/South-Western. All rights reserved.  Lack of price competition leads to greater profits. 4–23 .

thus shifting power with buyers back to the firm. 4–24 . causing them to exit.Cost Leadership Strategy: Buyers Bargaining Power of Buyers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can mitigate buyers’ power by:  Driving prices far below competitors. All rights reserved. Bargaining power of buyers © 2007 Thomson/South-Western.

4–25 .Cost Leadership Strategy: Suppliers Bargaining Power of Suppliers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can mitigate suppliers’ power by:  Being able to absorb cost increases due to low cost position. All rights reserved. reducing chance of supplier using power. Bargaining power of buyers © 2007 Thomson/South-Western.  Being able to make very large purchases.

Bargaining power of buyers © 2007 Thomson/South-Western. 4–26 .  The time it takes to move down the learning curve. All rights reserved.Cost Leadership Strategy: New Entrants The Threat of Potential Entrants Threat of new entrants Rivalry among competing firms Threat of substitute products 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.

All rights reserved.Cost Leadership Strategy: Substitutes Product Substitutes Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Cost leader is well positioned to:  Make investments to be first to create substitutes. © 2007 Thomson/South-Western.  Buy patents developed by potential substitutes. 4–27 . Bargaining power of buyers  Lower prices in order to maintain value position.

All rights reserved. may successfully imitate the cost leader’s strategy. © 2007 Thomson/South-Western. 4–28 . using their own core competencies.  Focus on cost reductions may occur at expense of customers’ perceptions of differentiation  Competitors.Cost Leadership Strategy (cont’d) • Competitive Risks  Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations.

All rights reserved. © 2007 Thomson/South-Western.  Focus is on nonstandardized products  Appropriate when customers value differentiated features more than they value low cost. 4–29 .Differentiation Strategy • An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.

All rights reserved.How to Obtain a Differentiation Advantage Control Cost Drivers if needed Reconfigure Value Chain to maximize  Lower buyers’ costs  Raise performance of product or service  Create sustainability through:  Customer perceptions of uniqueness  Customer reluctance to switch to nonunique product or service © 2007 Thomson/South-Western. 4–30 .

© 2007 Thomson/South-Western. by Michael E. 1998 by Michael E. from Competitive Advantage: Creating and Sustaining Superior Performance.4 Examples of Value-Creating Activities Associated with the Differentiation Strategy SOURCE: Adapted with the permission of The Free Press. Porter. 47. Porter.Figure 4. 4–31 . Copyright © 1985. an imprint of Simon & Schuster Adult Publishing Group. All rights reserved.

Value-Creating Activities and Differentiation • Highly developed MIS • Emphasis on quality • High quality replacement parts • Superior handling of incoming raw materials • Attractive products • Rapid response to customer specifications • Worker compensation for creativity/productivity • Use of subjective performance measures • Basic research capability • Technology • High quality raw materials • Delivery of products • Order-processing procedures • Customer credit • Personal relationships © 2007 Thomson/South-Western. 4–32 . All rights reserved.

Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers © 2007 Thomson/South-Western. All rights reserved. 4–33 .Differentiation Strategy: Competitors Rivalry with Competitors Threat of new entrants • Defends against competitors because brand loyalty to differentiated product offsets price competition.

All rights reserved.Differentiation Strategy: Buyers Bargaining Power of Buyers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases. Bargaining power of buyers © 2007 Thomson/South-Western. 4–34 .

All rights reserved. 4–35 .Differentiation Strategy: Suppliers Bargaining Power of Suppliers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can mitigate suppliers’ power by:  Absorbing price increases due to higher margins. Bargaining power of buyers © 2007 Thomson/South-Western.  Passing along higher supplier prices because buyers are loyal to differentiated brand.

Differentiation Strategy: New Entrants The Threat of Potential Entrants Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can defend against new entrants because:  New products must surpass proven products. 4–36 . but offered at lower prices. All rights reserved. Bargaining power of buyers © 2007 Thomson/South-Western.  New products must be at least equal to performance of proven products.

All rights reserved.Differentiation Strategy: Substitutes Product Substitutes Threat of new entrants Rivalry among competing firms Threat of substitute products 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. 4–37 . Bargaining power of buyers © 2007 Thomson/South-Western.

Competitive Risks of Differentiation • The price differential between the differentiator’s product and the cost leader’s product becomes too large. © 2007 Thomson/South-Western. All rights reserved. 4–38 . • Counterfeit goods replicate differentiated features of the firm’s products. • Differentiation ceases to provide value for which customers are willing to pay. • Experience narrows customers’ perceptions of the value of differentiated features.

All rights reserved.  Particular buyer group—youths or senior citizens  Different segment of a product line—professional craftsmen versus do-it-yourselfers  Different geographic markets—East coast versus West coast © 2007 Thomson/South-Western.Focus Strategies • An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. 4–39 .

in order to develop and sustain a competitive advantage and earn aboveaverage returns. All rights reserved. 4–40 .Focus Strategies (cont’d) • Types of focused strategies  Focused cost leadership strategy  Focused differentiation strategy • To implement a focus strategy. firms must be able to:  Complete various primary and support activities in a competitively superior manner. © 2007 Thomson/South-Western.

• A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors. © 2007 Thomson/South-Western. 4–41 . • Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.Factors That Drive Focused Strategies • Large firms may overlook small niches. All rights reserved. • A firm may lack the resources needed to compete in the broader market.

All rights reserved. 4–42 .Competitive Risks of Focus Strategies • A focusing firm may be “outfocused” by its competitors. © 2007 Thomson/South-Western. • A large competitor may set its sights on a firm’s niche market. • Customer preferences in niche market may change to more closely resemble those of the broader market.

 Effectively leverage its core competencies while competing against its rivals. All rights reserved.  Learn new skills and technologies more quickly.Integrated Cost Leadership/ Differentiation Strategy • A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to:  Adapt quickly to environmental changes. 4–43 . © 2007 Thomson/South-Western.

 Flexible manufacturing systems (FMS)  Information networks  Total quality management (TQM) systems © 2007 Thomson/South-Western. All rights reserved.Integrated Cost Leadership/ Differentiation Strategy (cont’d) • Commitment to strategic flexibility is necessary for implementation of integrated cost leadership/differentiation strategy. 4–44 .

© 2007 Thomson/South-Western. 4–45 .Flexible Manufacturing Systems • Computer-controlled processes used to produce a variety of products in moderate. All rights reserved. flexible quantities with a minimum of manual intervention.  Allows firms to produce large variety of products at relatively low costs.  Goal is to eliminate the “low-cost-versus-wide product-variety” tradeoff.

and customers.  Improve flow of work among employees in the firm and their counterparts at suppliers and distributors.Information Networks • Link companies electronically with their suppliers. distributors.  Customer relationship management (CRM) © 2007 Thomson/South-Western. All rights reserved. 4–46 .  Facilitate efforts to satisfy customer expectations in terms of product quality and delivery speed.

4–47 . problem-solving approaches  Empowerment of employee groups and teams • Benefits  Increased customer satisfaction  Lower costs  Reduced time-to-market for innovative products © 2007 Thomson/South-Western. All rights reserved.Total Quality Management (TQM) Systems • Emphasize total commitment to the customer through continuous improvement using:  Data-driven.

Risks of the Integrated Cost Leadership/ Differentiation Strategy • Often involves compromises  Becoming neither the lowest cost nor the most differentiated firm. 4–48 . • Becoming “stuck in the middle”  Lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy. All rights reserved. © 2007 Thomson/South-Western.

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