Business Level StrategyChapter 5
Built by Stambaugh/2009 The purpose of business is to create and keep a customer … Drucker
Jeff StambaughDillard College of Business/Rm 257A
[email protected]://faculty.mwsu.edu/business/jeff.stambaugh
Today’s Objectives
Built by Stambaugh/2009
■ Understand business level strategy■ Understand the generic business level strategies
■ Uses■ Risks
■ Understand how the internet and industry life cycle affect the above
The purpose of business is to create and keep a customer … Drucker
The Beginning of a Strategy
Built by Stambaugh/2009
■ Who are our customers?■ What needs are we going to meet?■ How will we meet them?■ And how will be do the above better than any of our
current or future competitors … what is our what is our competitive advantagecompetitive advantage?
The purpose of business is to create and keep a customer … Drucker
Fundamental Questions
Built by Stambaugh/2009
■ How am we going to create value for our customer (or less noble—how are we going to motivate them to buy our product / service?):
■ By being the cheapest?■ By offering the most desirable features / services?■ By serving a niche market?■ By melding low cost and some unique features?
■ And how do my competitive advantages play into this?
Business-level strategy: decisions that describes how firm will compete in its chosen industry / market segment
The purpose of business is to create and keep a customer … Drucker
Generic Strategies
Built by Stambaugh/2009
■ Cost Leadership■ Differentiation■ Focus
The purpose of business is to create and keep a customer … Drucker
Overall Cost Leadership
Built by Stambaugh/2009
■ Comparable (decent) product that you can produce cheaper than competitors by ….
■ Scale-efficient operations■ Cost reductions from experience■ Overall cost control■ Avoid marginal accounts■ Squeeze value chain
■ Lower costs + same price to consumer = higher profits (or increased volume = higher profits)
The purpose of business is to create and keep a customer … Drucker
Overall Cost Leadership
Built by Stambaugh/2009 The purpose of business is to create and keep a customer … Drucker
Efficiency is key concept
Benefits / Risks of Cost Leadership
Built by Stambaugh/2009
■ Strong “position” in Porter’s Five Forces (p. 161)■ Volume and price sensitivity are assets
■ What’s hard to imitate about this?■ All cost, no customer?
The purpose of business is to create and keep a customer … Drucker
Differentiation
Built by Stambaugh/2009
■ Bases for differentiation■ Prestige■ Product features■ Service
Competitive advantage comes when people Competitive advantage comes when people pay more for it than it costs you to provide itpay more for it than it costs you to provide it
The purpose of business is to create and keep a customer … Drucker
Differentiation
Built by Stambaugh/2009 The purpose of business is to create and keep a customer … Drucker
Unique Value is key concept
Benefits / Risks of Differentiation
Built by Stambaugh/2009
■ Customer loyalty creates■ Barriers to entry■ Switching costs
■ Higher margins = more flex■ What if customer doesn’t perceive the product as
special■ “Wrong differentiation” --- features■ Price too high■ Easily imitated
The purpose of business is to create and keep a customer … Drucker
Starbucks’ sales growth has been slipping of late. What do you think is the problem
1. Other places have improved their coffee and its much cheaper
2. Starbucks prices are just too high
3. Starbucks doesn’t seem special any more
4. Starbucks offers stuff I don’t want
Focus Strategies
Built by Stambaugh/2009
■ Geographic■ Demographic■ Income scale (both high and low)■ Unique product requirements■ Risks
■ Competitor may “out-focus” you■ Your niche evaporates■ You over-focus
The purpose of business is to create and keep a customer … Drucker
Combination Strategy(Integrated Cost and Differentiation)
Built by Stambaugh/2009
■ Efficiently provide unique value (hit the mid-spectrum)
■ Tougher to imitate■ Mass customization■ Pick your point in the profit pool (the 20-80 rule)■ E-linking value chains
The purpose of business is to create and keep a customer … Drucker
Risks of Combination Strategy
Built by Stambaugh/2009
■ You are nothing to everyone■ Stuck in the Middle
■ Can’t execute (cost reductions aren’t there or can’t build loyalty)
Combination strategy is usually the most Combination strategy is usually the most difficult to execute because it is a balancing actdifficult to execute because it is a balancing act
The purpose of business is to create and keep a customer … Drucker
How Well Do They Work?
Built by Stambaugh/2009
Performance
Competitive Advantage
Return oninvestment (%) 35.5 32.9 30.2 17.0 23.7 17.8
Sales Growth (%) 15.1 13.5 13.5 16.4 17.5 12.2
Gain in MarketShare (%) 5.3 5.3 5.5 6.1 6.3 4.4
Sample Size 123 160 100 141 86 105
Differentiation and Cost Differentiation Cost
Differentiation Focus
Cost Focus
Stuck in the Middle
The purpose of business is to create and keep a customer … Drucker
What hath the internet wrought?
Built by Stambaugh/2009
■ Made it easier to cut costs (bidding, paperless, more automated services)
■ Made niche markets more viable (mass customization)
■ Customers have more info
Consensus: sustainable competitive Consensus: sustainable competitive advantages harder to come by in internet eraadvantages harder to come by in internet era
The purpose of business is to create and keep a customer … Drucker
Blue Oceans
Built by Stambaugh/2009
■ Move into new (uncontested) market space by:■ Create / Capture New Demand■ Defy the cost-value tradeoffs (low cost-high value)
■ By■ Eliminating “value-less” TFG factors■ Raising some factors, lowering others (Reverse positioning)■ Creating new, valued factors■ Attracting new customers to the industry (Breakaway
positioning)
The purpose of business is to create and keep a customer … Drucker
Lower price /higher value to tap into untouched Lower price /higher value to tap into untouched mass marketmass market
What would it take to get you to buy a (or another) video game console?
1. Own one – better graphics
2. Own one – better games
3. Own one – more connections to internet / high tech features
4. Don’t own one – lower price
5. Don’t own one – easier to operate
6. Don’t own one – less cosmic games
Industry Life Cycle
Built by Stambaugh/2009 The purpose of business is to create and keep a customer … Drucker
Life Cycle Strategies
Built by Stambaugh/2009
Generic strategies
Differentiation Differentiation Diff / Cost Cost Ldr Ldr
Market growth rate
Low Very large Low to Negativemoderate
Number of segments
Very few Some Many Few
Intensity of competition
Low Increasing Very intense Changing
Emphasis on product design
Very high High Low to Lowmoderate
StageIntroduction Growth Maturity DeclineFactor
The purpose of business is to create and keep a customer … Drucker
Life Cycle Strategies
Built by Stambaugh/2009
Emphasis on process design
Low Low to High Lowmoderate
Major functional area(s) of concern
Research and Sales and Production GeneralDevelopment marketing management
and finance
Overall objective
Increase Create Defend Consolidate,market share consumer market share maintain, awareness demand and extend harvest, or
product life exitcycles
Stage
Factor Introduction Growth Maturity Decline
The purpose of business is to create and keep a customer … Drucker
You are a senior manager at Nokia (cell phone) and have just been given an additional $100M
to fight back against the iPhone. Where do you spend the money (pick only one)
1. Increase advertising
2. Cut price on our product that is closest to iPhone
3. Spend on R&D to make our product cooler than iPhone
4. Invest in production equipment to cut our manufacturing costs
Critique
Built by Stambaugh/2009
■ Life Cycle is not inevitable■ Sustaining and disrupting innovations
■ Mature stage strategies■ Maintaining■ Harvesting■ Exiting■ Consolidation
■ Turnaround strategies■ Prune assets (cash), products (get back to basics), costs
(put it on a diet)
The purpose of business is to create and keep a customer … Drucker
Summary
Built by Stambaugh/2009
■ Step One is to figure out how you want to add value for the customer
■ Generic strategies + Combination + Blue Ocean■ Beware the Cycle■ Compete “smartly”
The purpose of business is to create and keep a customer … Drucker