Chapter 4 strategic management competitiveness and globalization 10e

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, relative to that of competito

PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

CHAPTER 4:

BUSINESS-LEVEL STRATEGY

THE STRATEGIC MANAGEMENT PROCESS

● Define business-level strategy.

● Discuss the relationship between customers and business-level

strategies in terms of who, what, and how.

● Explain the differences among business-level strategies.

● Use the five forces of competition model to explain how average returns can be earned through each business-level strategy.

above-KNOWLEDGE OBJECTIVES

MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS

■ With the 2008 global financial crisis and competitors, e.g., McDonald’s gaining market share, consumers were less willing to pay the high prices for premium coffee, leading to a reduction in store sales for the first time in Starbucks’ history.

■ Starbucks appeared to be unable to control the quality of the “experience” and began losing its differentiation advantage.

OPENING CASE

MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS (cont’d)

■ CEO Howard Schultz closed 900 poorly performing stores in the United States and

refocused on innovation.

■ By 2011, with its 40th anniversary, a new logo, innovation such as VIA and customers paying for their purchases with their iPhones, environmental consciousness, employee health insurance, and a global focus on emerging markets such as China and India, Starbucks was once again differentiating itself.

OPENING CASE

BUSINESS–LEVEL STRATEGY: HOW

TO COMPETE IN A SPECIFIC INDUSTRY

■ 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

■ It is the core strategy

■ Every firm must form and use a business-level strategy for each one of its businesses

■ Business-level strategy choices matter because long-term performance is linked to a firm’s strategies

IMPORTANT DEFINITION

• A single-product market/single geographic location firm employs one business-level strategy and one corporate- level strategy identifying what or which industry the firm will compete in

ONE BUSINESS-

LEVEL STRATEGY

• A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity

SEVERAL

BUSINESS-LEVEL STRATEGIES

BUSINESS-LEVEL STRATEGY

CORE COMPETENCIES AND STRATEGY

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

individual product markets

Resources and superior capabilities that are sources

of competitive advantage over a firm’s rivals

CUSTOMERS: THEIR RELATIONSHIP TO

BUSINESS-LEVEL STRATEGIES

KEY ISSUES

in BUSINESS-

LEVEL

Who will be served?

What needs will

be satisfied?

CUSTOMERS: THEIR RELATIONSHIP TO

Quickly and successfully adapt products/services

to meet those needs

FIVE COMPETITIVE FORCES

VALUE CHAIN ACTIVITIES

RISKS for each Strategy

CUSTOMERS: THEIR RELATIONSHIP TO

BUSINESS-LEVEL STRATEGIES

SATISFYING CUSTOMERS IS THE FOUNDATION OF

SUCCESSFUL BUSINESS STRATEGIES

• Managing relationships with customers

• Reach, richness, affiliation

• Who will be served

• What needs will be satisfied

• How those needs will be satisfied

CUSTOMERS: THEIR RELATIONSHIP TO

MARKET SEGMENTATION

A process used to cluster people with similar needs into

individual and identifiable groups

WHO: DETERMINING THE CUSTOMERS TO SERVE

Consumer Markets

Industrial Markets

(defined by boundaries between countries

or by regional differences within them)

4 COMMON BUYING FACTOR SEGMENTS

(cut across product market and geographic segments)

5 CUSTOMER SIZE SEGMENTS

WHAT: DETERMINING WHICH CUSTOMER NEEDS TO

HOW: DETERMINING CORE COMPETENCIES NECESSARY TO

SATISFY CUSTOMER NEEDS

■ Firms use core competencies to implement value creating strategies that satisfy customers’ needs

■ Value means goods or services that provide either low cost with acceptable features or highly differentiated features with acceptable costs

■ Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/or exceed customer expectations across time

To position itself, the firm must decide whether it intends to:

● Perform activities differently, or

● Perform different activities as compared to its rivals

SOURCES OF COMPETITIVE ADVANTAGE

■ Achieving LOWER OVERALL COSTS than rivals

■ Performing activities differently (reducing process costs)

■ Providing a low cost product that customers deem as ACCEPTABLE

■ Possessing the capability TO DIFFERENTIATE the firm’s product or service and command a premium price

■ Performing MORE HIGHLY VALUED activities

FIVE GENERIC BUSINESS-LEVEL STRATEGIES

FIGURE 4.2

Five Business Level

Strategies

TARGET MARKETS

BUSINESS-LEVEL STRATEGY EFFECTIVENESS

■ None of the five business-level strategies is inherently or

universally superior to the others

■ The effectiveness of each strategy is contingent upon:

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, relative to that of competitors with

features that are acceptable to customers

■ Relatively standardized products

■ Features acceptable to many customers

■ Lowest competitive price

COST LEADERSHIP STRATEGY:

VALUE CHAIN ACTIVITIES

■ Value chain analysis identifies the parts of a firm’s operations that create value and those that do not

■ A competitive advantage in logistics creates more value for a cost leadership strategy than for a differentiation strategy

 Inbound logistics [materials handling, warehousing, and inventory control]

 Outbound logistics [collecting, storing, and distribution]

COST LEADERSHIP STRATEGY:

COST SAVING ACTIONS

■ Employing process innovations that facilitate efficient production and distribution methods

■ 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

COST LEADERSHIP STRATEGY:

VALUE CHAIN ACTIVITIES

• Monitor suppliers’ performances

• Link suppliers’ products to production

processes

• Economies of scale

• Efficient-scale facilities

• Effective delivery schedules

RECONFIGURE THE VALUE CHAIN FOR COST ADVANTAGE

VALUE-CREATING ACTIVITIES FOR COST

LEADERSHIP

RECONFIGURE THE VALUE CHAIN FOR A COST ADVANTAGE

 Alter production process

 Change in automation

 New distribution channel

 New advertising media

 Direct sales in place of indirect sales

 New raw material

 Forward integration

 Backward integration

 Change location relative to suppliers or buyers

COST LEADERSHIP STRATEGY:

increasing prices on some goods.

■ Recognizing its mistake, Walmart has re-focused on low costs and prices, increased its product diversity,

and is opening 40 new express stores.

COST LEADERSHIP STRATEGY: COMPETITORS

Threat of new entrants

– Rivalry may be based on factors such

as size, resources, location, market dependence, and prior competitive interactions

COST LEADERSHIP STRATEGY: BUYERS

(CUSTOMERS)

BARGAINING POWER OF

BUYERS

• Can mitigate buyers’ power by:

– Driving prices far below competitors, causing them to exit, thus shifting power away from buyers back to the firm

– Powerful customers can force a cost leader to reduce its prices, but not below the level where the next-most-efficient industry competitor can earn average returns

Threat of new entrants

COST LEADERSHIP STRATEGY: SUPPLIERS

BARGAINING POWER OF

SUPPLIERS

• Can mitigate suppliers’ power by:

– Being able to absorb cost increases due to low cost position

– Being able to make very large purchases, reducing chance of supplier using power

– Outsourcing, to reduce costs may also require relationship-building (Guanxi), particularly to a foreign supplier

Threat of new entrants

produ cts

COST LEADERSHIP STRATEGY:

NEW ENTRANTS

THREAT OF POTENTIAL

ENTRANTS

• Barriers to potential entrants:

– Their need to enter on a large scale in order to be cost competitive

– The time it takes to move up the learning curve

– Efficiency of cost leaders through continuous efforts to reduce costs enhances profit margins and serves as a significant entry barrier

Threat of new entrants

COST LEADERSHIP STRATEGY: SUBSTITUTES

PRODUCT SUBSTITUTES • Cost leader is well positioned to:

– Make investments to be first to create substitutes

– Buy patents developed by potential substitutes

– Lower prices in order to maintain value position

– Be more flexible than its differentiated competitors

Threat of new entrants

produ cts

COST LEADERSHIP STRATEGY:

RISKS

• COMPETITIVE RISKS

– OBSOLESCENCE: processes used to produce and distribute

goods/services may become obsolete due to competitors’ innovations

– COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation

– IMITATION: competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

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

differentiated features more than they value low cost

differentiated products at competitive costs to reduce upward pressure on the price that

customers pay

DIFFERENTIATION STRATEGY:

DISTINCTIVE ACTIONS

Firms seek to be different from competitors on as many dimensions as

possible Differentiation approaches

■ Unusual features

■ Responsive customer service

■ Rapid product innovations

■ Technological leadership

■ Perceived prestige and status

• Highly developed MIS

• Emphasis on quality

• Worker compensation for

creativity/productivity

• Use of subjective performance measures

• Basic research capability

VALUE-CREATING ACTIVITIES FOR

DIFFERENTIATION

• High quality replacement parts

• Superior handling of incoming raw materials

VALUE-CREATING ACTIVITIES FOR

DIFFERENTIATION

RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS

 Whereas cost leadership targets a specific industry, differentiation creates value by distinguishing products/services

 A firm must consistently upgrade differentiated features that customers value and/or create new valuable features (innovate) without significant cost increases

 Create sustainability through:

 Customer perceptions of distinctiveness

 Customer reluctance to switch to non-distinctive products

DIFFERENTIATION STRATEGY: COMPETITORS

• The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry

• Reputation can also sustain the competitive advantage of firms following a differentiation strategy

Threat of new entrants

DIFFERENTIATION STRATEGY: BUYERS

(CUSTOMERS)

• Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases

• Customers are willing to accept a price increase when a product satisfies their perceived unique needs, as long as they

do not think that an acceptable product alternative exists

Threat of new entrants

Threat of su bstitu te

produ cts

BARGAINING POWER OF

BUYERS

DIFFERENTIATION STRATEGY: SUPPLIERS

• Can mitigate suppliers’ power by:

– Absorbing price increases due to higher margins from high-quality components

– Alternatively, considering buyers’ relative insensitivity to price increases and their brand loyalty, firms may pass along higher supplier prices to the buyer

Threat of new entrants

DIFFERENTIATION STRATEGY: NEW ENTRANTS

• Substantial barriers to potential entrants:

– Customer loyalty and the need to overcome the uniqueness of a differentiated product

– New products must surpass proven products

– New products must be at least equal to the performance of proven products, but offered at lower prices

Threat of new entrants

Threat of su bstitu te

produ cts

THREAT OF POTENTIAL

ENTRANTS

DIFFERENTIATION STRATEGY: SUBSTITUTES

• Well-positioned relative to substitutes because:

– Brand loyalty to a differentiated product tends to reduce:

– customers’ testing of new products

– switching brands

Threat of new entrants

■ a Particular buyer group (e.g., youths or

senior citizens)

■ Different segment of a product line (e.g., products for professional painters or the do-it- yourself group)

■ Different geographic market (e.g., northern

FOCUSED STRATEGIES

Types of focused strategies:

■ Focused cost leadership strategy

■ Focused differentiation strategy

To implement a focus strategy, firms must be able to:

Complete various value chain activities in a competitively superior manner in order to develop and sustain a competitive advantage and earn above-average returns

FACTORS THAT DRIVE FOCUSED STRATEGIES

■ Large firms may overlook small niches

■ A firm may lack the resources needed to compete in the

broader market

■ A firm is able to serve a narrow market segment more

effectively than its larger industry-wide competitors can

■ Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

FOCUSED COST LEADERSHIP STRATEGY

A firm focuses on a niche market, adding value by leveraging value chain activities that allow value-creation through

the cost leadership strategy

■ Competitive advantage: low-cost

■ Competitive scope: narrow industry

segment

FOCUSED DIFFERENTIATION STRATEGY

The value chain may be analyzed to determine if a firm

is able to link the activities required to create value by

using the focused differentiation strategy

FOCUS STRATEGIES: RISKS

– CHANGING PREFERENCES: customer preferences in the niche market may change to more closely resemble those of the broader market

INTEGRATED COST LEADERSHIP/

DIFFERENTIATION STRATEGY

Efficiently produce products with differentiated attributes:

• EFFICIENCY: SOURCES OF LOW COST

• DIFFERENTIATION: SOURCE OF UNIQUE VALUE

■ Readily adapts to external environmental changes

■ Concentrates simultaneously on TWO sources of competitive advantage: cost and differentiation

■ Competence and flexibility required in several value chain activities

INTEGRATED COST LEADERSHIP/

DIFFERENTIATION STRATEGY

Three sources of flexibility useful for this strategy:

■ Flexible manufacturing systems (FMS)

■ Information networks

■ Total quality management (TQM) systems

FLEXIBLE MANUFACTURING SYSTEMS

Computer-controlled processes used to produce a variety

of products in moderate, flexible quantities with a

minimum of manual intervention

■ Goal is to eliminate the “low cost versus wide product variety” tradeoff

■ Allows firms to produce large variety of products at relatively low costs

INFORMATION NETWORKS

Links companies electronically with their suppliers,

distributors, and customers

■ Facilitates efforts to satisfy customer expectations in terms of product quality and delivery speed

■ Improves flow of work among employees in the firm and their counterpart suppliers and distributors

■ Requires customer relationship management (CRM)