1 BUSINESS LEVEL STRATEGY STRATEGIC MANAGEMENT BUAD 4980
Dec 22, 2015
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BUSINESS LEVEL STRATEGY
BUSINESS LEVEL STRATEGY
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Three Generic StrategiesThree Generic Strategies
1. Overall cost leadership
Low cost producer relative to a firm’s peers
Drive costs down throughout value chain
2. Differentiation
Products and/or services that are unique and valued accordingly
Non-price attributes for which customers will pay a premium
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Three Generic StrategiesThree Generic Strategies
3. Focus strategy
Narrow product lines, buyer segments, or targeted geographic markets
Attain advantages either through differentiation or cost leadership in the focus markets
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Three Generic StrategiesThree Generic Strategies
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Three Generic Strategies: Company Examples
Three Generic Strategies: Company Examples
Overall Cost leadership strategy
McDonalds
Wal-Mart
Differentiation strategy
Harley Davison
Apple
Focus strategy
Rolex
Lamborghini
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Three Generic StrategiesThree Generic Strategies
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Overall Cost LeadershipOverall Cost Leadership
Interrelated tactics that include:
Development of efficiently scaled and modernized facilities
Tight cost and overhead control
Avoidance of marginal customer accounts
Cost minimization in all activities in the firm’s value chain
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Overall Cost LeadershipOverall Cost Leadership
Experience curve
Businesses “learn” to lower costs as they gain experience with production processes
Unit costs of production decline as output increases in most industries
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Overall Cost LeadershipOverall Cost Leadership
Cost differentiation vs. competitors
Permits a cost leader to translate cost advantages directly into higher profits than competitors
Allows low cost producer to earn above-average profits
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Overall Cost LeadershipOverall Cost Leadership
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Overall Cost Leadership Strategies vis-à-vis Porter’s Five Forces ModelOverall Cost Leadership Strategies vis-à-vis Porter’s Five Forces Model Protects a firm against rivalry from higher cost competitors
Protects a firm against powerful buyers due to ability to adjust prices and maintain reasonable margins
Provides more flexibility to accommodate input cost pressure from powerful suppliers while maintaining reasonable margins
Provides substantial entry barriers from economies of scale and cost advantages that competitors can’t duplicate easily
Puts the firm in a favorable position with respect to substitute products
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Pitfalls of Overall Cost Leadership Strategies
Pitfalls of Overall Cost Leadership Strategies
Too much focus on one or a few value-chain activities
All rivals share a common input or raw material
The strategy is imitated too easily
Product differentiation must be minimal
Margin reduction by adjusting sale prices too readily to perceived market threats
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DifferentiationDifferentiation
Prestige or brand image
Technological superiority
Innovation / new on the market
Value-added Features
Customer service
Dealer / distribution network
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DifferentiationDifferentiation
Firms may differentiate along several dimensions at once
Successful differentiation requires integration with all parts of a firm’s value chain
An important aspect of differentiation is speed or quick response (first out of the box)
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Creates higher entry barriers due to customer preference for product attributes
Provides higher margins that enable the firm to deal with supplier power
Establishes customer loyalty and hence less threat from substitutes
Differentiation Strategies vis-à-vis Porter’s Five Forces Model
Differentiation Strategies vis-à-vis Porter’s Five Forces Model
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Uniqueness that is not valuable to customers
Too much differentiation (not all customers value all features)
Too high a price premium
Differentiation that is easily imitated by competition
Pitfalls of Differentiation StrategiesPitfalls of Differentiation Strategies
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Based on the choice of a narrow competitive scope within an industry
Firm selects a segment or group of segments (niche) and tailors its strategy to serve them
Firm achieves competitive advantages by dedicating itself to these segments exclusively
FocusFocus
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Cost focus
Create a cost advantage in a narrow target market segment
Differentiation focus
Differentiate product in a narrow target market segment
FocusFocus
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Focus Strategies vis-à-vis Porter’s Five Forces Model
Focus Strategies vis-à-vis Porter’s Five Forces Model
Create barriers to entry through either cost leadership, differentiation, or both
Select niches that are least vulnerable to substitutes or where competitors are weakest
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Pitfalls of Focus StrategiesPitfalls of Focus Strategies
Erosion of cost advantages within the narrow segment
Focused products and services still subject to competition from new entrants and from imitation
Can become so focused on satisfying buyer needs that the value/cost relationship declines
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Combination StrategiesCombination Strategies
Develop automated and flexible manufacturing systems
Exploiting the “profit pool” concept for competitive advantage
Coordinating the “extended” value chain by way of information technology
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Profit Pool Example: Automobile Industry
Profit Pool Example: Automobile Industry
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Creates high entry barriers
Increased bargaining power over suppliers
Reduces power of buyers (fewer competitors)
Low cost / high value position reduces threat from substitute products
Reduces the possibility of head-to-head rivalry
Combination Strategies vis-à-vis Porter’s Five Forces Model
Combination Strategies vis-à-vis Porter’s Five Forces Model
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Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”
Miscalculating sources of revenue and profit pools in the firm’s industry
Pitfalls of Combination StrategiesPitfalls of Combination Strategies
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Overall Cost Leadership
Online bidding and order processing are eliminating the need for personal sales calls and are minimizing sales overhead
Online purchase orders are making many transactions paperless, thus reducing the costs of procurement and office supplies
Impact of the Internet on Strategy Achievement
Impact of the Internet on Strategy Achievement
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Differentiation
Internet-based management systems link all parts of the organization, shorten response times and accelerate organization learning
Quick online response to service requests, rapid attention to customer feedback, and online product promotions are enhancing marketing efforts
Impact of the Internet on Strategy Achievement
Impact of the Internet on Strategy Achievement
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Focus
Permission marketing techniques are focusing sales efforts on specific customers who opt to receive advertising notices
Niche portals that target specific groups are providing advertisers with access to viewers with specialized interests
Impact of the Internet on Strategy Achievement
Impact of the Internet on Strategy Achievement
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Refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry
Industry Life-CycleIndustry Life-Cycle
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Stages of the Industry Life-CycleStages of the Industry Life-Cycle
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The Introduction Stage
Products are unfamiliar to consumers
Market segments not well defined
Product features not clearly specified
Competition tends to be limited
Stages of the Industry Life-CycleStages of the Industry Life-Cycle
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Introduction Stage strategies:
Develop product and get users to try it
Generate exposure so product becomes “standard”
Stages of the Industry Life-CycleStages of the Industry Life-Cycle
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Stages of the Industry Life-CycleStages of the Industry Life-Cycle
The Growth Stage
Characterized by strong increases in sales
Attractive to potential competitors
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Growth Stage strategies:
Focus on brand recognition
Focus on differentiated products
Invest financial resources to support value-chain activities
Stages of the Industry Life-CycleStages of the Industry Life-Cycle
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Stages of the Industry Life-CycleStages of the Industry Life-Cycle
The Maturity Stage
Aggregate industry demand slows
Market becomes saturated, few new adopters
Direct competition becomes predominant
Marginal competitors begin to exit
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Maturity Stage strategies:
Efficient manufacturing operations and process engineering
Low costs (customers become price sensitive)
Stages of the Industry Life-CycleStages of the Industry Life-Cycle
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Stages of the Industry Life-CycleStages of the Industry Life-Cycle
The Decline Stage
Industry sales and profits begin to fall
Strategic options become dependent on the actions of rivals
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Decline Stage strategies:
Maintaining market share
Exiting the market
Harvesting (cash cow)
Consolidation (acquire competition)
Stages of the Industry Life-CycleStages of the Industry Life-Cycle
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Turnaround strategies for declining industries:
Reverse a firm’s decline in performance and return it to growth and profitability
Strategic options:
Asset and cost surgery
Selective product and market pruning
Piecemeal productivity improvements
Stages of the Industry Life-CycleStages of the Industry Life-Cycle
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Case Analysis: The Experience CurveCase Analysis: The Experience Curve The concept of the experience curve was developed in 1968 by
the Boston Consulting Group (BCG)
The fundamental premise of the theory is that as output doubles, costs typically decline by 10% - 30% due to rapid gain in efficiencies achieved by producers
Key factors impacting the experience curve:
1. Most experience curve gains come early in the product life cycle where the most rapid increase in output and process improvement occurs
2. High technology or complex processes offer the greatest experience curve benefits
3. Product sensitivity to price creates greater opportunity to take advantage of the experience curve
4. Competitors with good market position and access to capital can also duplicate experience curve benefits
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Case Analysis: Ryanair – A Highly Effective Overall Cost Leadership Strategy
Case Analysis: Ryanair – A Highly Effective Overall Cost Leadership Strategy
Ryanair is a Dublin-based budget air carrier that has adopted a very different service concept than most other airlines
The airline charges for all extras, allowing it to offer much lower average fares than US budget airlines, such as Southwest
Ryanair achieves over double the margins of Southwest
Most of Ryanair’s tickets are sold online
By charging for checked bags, snacks, bottled water and other extras, and offering retail items such as cameras and MP3 players, Ryanair acts like a retailer – making a profit on everything it sells
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Case Analysis: How Netflix Boosts its Differentiation
Case Analysis: How Netflix Boosts its Differentiation Netflix has grown rapidly as a competitor to other movie rental
companies, using a virtual online store and soliciting movie ratings from subscribers
Customers are asked to rate each movie they watch, and Netflix uses this information to develop a profile of movie preferences so it can tailor its offering to customers
The company also uses “friending” to allow customers to see the movies and recommendations of online friends
This process allows Netflix to get very close to customers, thereby creating loyalty and increased sales
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Case Analysis: Paccar - “Trucking Along” With a Successful Focus Strategy
Case Analysis: Paccar - “Trucking Along” With a Successful Focus Strategy
Paccar is a large semi-trailer truck manufacturer with 20% of the North American market
The company caters to owner-operators who want customized features on their long-haul trucks
At Paccar’s dealer locations, buyers can select customized features online
Custom features include luxurious sleeper cabs, leather driving seats, noise-insulated cabins, custom paint styling, etc…
Paccar makes all its trucks to order
The company offers a roadside assistance program and spare parts logistics software to minimize customer roadside downtime
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Case Analysis: Liberty Mutual’s Electronic Invoice System – Combining Low Cost and
Differentiation Advantages
Case Analysis: Liberty Mutual’s Electronic Invoice System – Combining Low Cost and
Differentiation Advantages Liberty Mutual is the 6th largest property and casualty insurer in
the US
The company pioneered an electronic invoicing system for the legal bills associated with claims
Nearly 70% of the invoices the company receives are processed electronically
The invoicing system saves a substantial amount of overhead cost each year, while speeding the process of claims settlement
Reporting capabilities allow Liberty Mutual to analyze legal bills for excessive or duplicate billing, and benchmark across legal firms to determine cost efficiency
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Case Analysis: Reverse and Breakaway Positioning – How to Avoid Being Held Hostage to
the Life-Cycle Curve
Case Analysis: Reverse and Breakaway Positioning – How to Avoid Being Held Hostage to
the Life-Cycle Curve
Reverse positioning refers to the practice of stripping down the number of product features to a base-line product, then selectively adding a few high value-added features back
Breakaway positioning refers to the practice of re-associating a product from its former product category to a new product category, reaching a new market segment and competing with a different set of products
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Case Analysis: Reverse and Breakaway Positioning – How to Avoid Being Held Hostage to
the Life-Cycle Curve
Case Analysis: Reverse and Breakaway Positioning – How to Avoid Being Held Hostage to
the Life-Cycle Curve Commerce Bank stripped away all of other banks’ service
features and offered low interest rates and only a few, no-charge, basic services – such as more convenient 12/7 hours, on-site debit card creation and free coin counting machines
This has proved to be a very successful strategy, as assets have grown by seven-fold in six years
Swatch markets its watches not as fine jewelry, but as inexpensive fashion accessories, much like costume jewelry
Customers often buy multiple watches, matching each outfit style
Swatch has become the leading watch company in the world and acquired other more traditional watch companies, such as Longines, Omega and Hamilton
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