strategic management

1

Strategic
Management

MGT 450

– Level StrategyChapter
4

3

Chapter 2

The External
Environment

Chapter 3

The Internal
Organization

Vision
Mission

Chapter 4

-Level
Strategy

Chapter 5

Competitive
Rivalry and
Dynamics

Chapter 6

Corporate-Level
Strategy

Chapter 7

Merger and
Acquisition

Strategy

Chapter 8

International
Strategy

Chapter 9

Cooperative
Strategy

Strategy formulation

Strategic
Competitiveness

Above-Average Returns

Chapter 10

Corporate
Governance

Chapter 11

Organizational
Structure and

Controls

Chapter 12

Strategic
Leadership

Chapter 13

Strategic
Entrepreneurship

Strategy implementation

A
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The Strategic
Management Process

A-S-P
model

Chapter 4: -Level Strategy

Five content areas

1. Defining business-level strategy

2. Relationship between customers and business level strategy in terms of who,

what, and how

3. Differences among business-level strategies

4. Use the 5-Forces of competition model to explain how above average return

can be earned through each business –level strategy.

5. Risks of business-level strategies.

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Increasingly important to a firm’s success and concerned
with making choices among two or more alternatives.

Choices dictated by:
• External environment

• Internal resources, capabilities and core competencies

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level-strategy: Integrated and
coordinated set of commitments and actions
the firm uses to gain a competitive advantage
by exploiting core competencies in specific
product markets.

Introduction

Introduction

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A firm must use a
Level

Strategy

It is not necessary
to use all the

corporate level
strategies,

acquisition,
restructuring,
international…

From the dry
cleaner to the
multinational

corporation – a
firm must choose

at least one
business-level

strategy

The business level
strategy is the

core strategy – the
strategy that the

firm forms to
describe how it

intends to
compete in the
product market

Satisfying customers is the foundation of successful business strategies
1. Managing relationships with customers

2. Reach, richness, affiliation

3. Who will be served

4. What needs will be satisfied

5. How those needs will be satisfied

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In terms of customers, when selecting a business- level strategy the firm determines:

1) WHO will be served

2) WHAT needs those target customers have that it will satisfy

3) HOW those needs will be satisfied

Introduction

Customers: Their Relationship with
-Level Strategies

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Strategic competitiveness results when firm can
satisfy customers by using its competitive advantages

Returns earned are the lifeblood of firm

Most successful companies satisfy current customers
and/or meet needs of new customers

1. Effectively managing relationships w/ customers
• Deliver superior value increased customer satisfaction

• Strong interactive relationships is foundation

Ex: Amazon anticipates its customers needs using the information it has, and tries to serve them.

2. Reach, richness and affiliation ( 3 dimensions)
• Access and connection to customers

• Depth and detail of two-way flow of information between firm and customer

• Facilitating useful interactions with customers – viewing the world from the customer’s eyes

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Five
components
in customer
relationships

Customers: Their Relationship with
-Level Strategies

3. WHO: Determining the customers to serve
Market segmentation

• Dividing customers into groups based on differences in needs

Ex: Hill’s Pet Nutrition, A Division of Colgate-Palmolive

• Process used to cluster people with similar needs into individual and identifiable
groups

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Five
components
in customer
relationships

Customers: Their Relationship with
-Level Strategies

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Common Characteristics
on which customers’
needs vary are
illustrated in Table 4.1

– Standard industrial Classification

4. WHAT: Determining which customer needs to satisfy

What = Needs

• Related to a product’s benefits and features

• Must anticipate and be prepared: (I.e., High-quality? Low price?)

• Translate into features and performance capabilities of products

5. HOW: Determining core competencies necessary to satisfy customer
needs

• Core competencies: resources and capabilities that serve as source of
competitive advantage for firm over its rivals

• Use core competencies (How) to implement value creating strategies and
thereby satisfy customer needs.

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Five
components
in customer
relationships

Customers: Their Relationship with
-Level Strategies

Purpose: To create differences between position of a firm and its

competitors

Firm must make a deliberate choice to:

• Perform activities differently

• Perform different activities

Activity map exemplifies a firm’s Activities:

• How they are integrated

• Activity Fit is key to the sustainability of competitive

Advantage.

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Purpose of -Level Strategies

limited passengers service (no meals, no
seat assignment and no baggage

transfers) form a cluster for a strategic
theme.

Southwest Airlines principles of strategy

Six areas of strategic intent:

limited passenger service, frequent, reliable departures

lean, highly productive ground and gate crews, high aircraft
utilization with few aircraft models, very low ticket prices

short-haul, point-to-point routes between mid-sized cities,
and secondary airports.

Purpose of -Level Strategies

Purpose of -Level (BL) Strategies (con’t)

Two types of competitive advantage
firms must choose between

• Cost (Are we LOWER than others?)

• Uniqueness (Are we DIFFERENT?
How?)

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Two types of ‘competitive scope’ firms
must choose between

• Broad target

• Narrow target

These combine to yield 5 different BL strategies

The 5 business level
strategies we examine are
called generic because
they can be used in any
organization competing in
any industry.

Types of -Level Strategies
I. COST LEADERSHIP

Competitive advantage

• The low-cost leader

• operates with margins greater than competitors

Competitive scope: Broad

• Integrated set of actions

• designed to produce or deliver goods or services

with features that are acceptable to

customers at the lowest cost, relative to

competitors

• No-frill, standardized goods

• Continuously reduce costs of value chain activities

Low-cost position is a valuable defense against rivals

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Cost leaders are in a position to:

• Absorb supplier price increases and relationship demands

• Force suppliers to hold down their prices

Continuously improving levels of efficiency and cost
reduction

• Can be difficult to replicate and

• Serve as significant entry barriers to potential
competitors

Cost leaders hold an attractive position in terms of product
substitutes, with the flexibility to lower prices to retain
customers

• Examples: TK Maxx, Big Lots Inc., Wal-Mart

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Types of -Level Strategies (Cont’d)
I. COST LEADERSHIP

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Types of -Level Strategies (Cont’d)
I. COST LEADERSHIP

Cost leaders carefully examine all support activities to
find additional potential cost reductions.

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Highly efficient
systems to link
suppliers’
products with
the firm’s
production
processes

Use of
economies of
scale to reduce
production costs

Construction of
efficient-scale
production
facilities

A delivery
schedule that
reduces costs

Selection of low-
cost
transportation
carriers

A small, highly
trained sales
force

Products priced
so as to
generate
significant sales
volume

Efficient and proper
product
Installations in order
to reduce the
frequency
and severity
of
recalls

Systems and procedures to find the
lowest-cost (with acceptable quality)
products to purchase as raw materials

Frequent evaluation
processes to monitor
suppliers’ performances

Easy-to-use manufacturing
technologies

Investments in technologies in order
to reduce costs associated with a firm’s
manufacturing processes

Consistent policies
to reduce turnover costs

Cost-effective
management
information systems

Intense and effective training
programs to improve worker
efficiency and effectiveness

Simplified
planning practices to
reduce planning costs

Relatively few
managerial layers in order
to reduce overhead costs

Inbound logistics Operations Outbound logistics Marketing
and Sales

Service

Infrastructure

HRM

Technology
Development

Procurement

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Types of -Level Strategies (Cont’d)
I. COST LEADERSHIP

Cost Leadership in relation to the 5 Forces:

• Rivalry against existing competitors – Rivals hesitate to compete on the basis of price (in particular
against a company which is well established and able to produce its private-label products)

• Bargaining Power of Buyers (Customers) – Customers do not want to force a leader to lower the
price much as this will force other competitors to exit the market leaving the leader almost alone
controlling selling price

• Bargaining Power of Suppliers – As long as the company can keep effective margins greater than
those of competitors, it can absorb suppliers’ price increase – big players like Wal-Mart may have a
power over its suppliers

• Potential Entrants – They need to be able to operate at average return levels till they are able to
get into a cost leader position

• Product Substitutes – The company needs to be willing to offer more features to the
product/service, or reduce prices more – while still being able to operate profitably

Types of -Level Strategies

Competitive risks of the cost leadership strategy
• There is a limit to cost reduction

• Focus on cost may cause the firm to overlook important customer
preferences

• Imitation

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Competitive advantage

• Differentiation

Competitive scope: Broad

• Integrated set of actions designed by a firm to
produce or deliver goods or services at an
acceptable cost that customers perceive as being
different in ways that are important to them

• Target customers perceive product value

• Customized products – differentiating on as many
features as possible

Ex: Apple’s iPod

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Types of -Level Strategies (Cont’d)
II. Differentiation

Competitive Risks of the differentiation strategy

• Customers determine that the cost of differentiation is too
great

• The means of differentiation may cease to provide value for
which customers are willing to pay

• Experience can narrow customers’ perceptions of the value
of a product’s differentiated features

• Counterfeiting/copying

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Types of -Level Strategies (Cont’d)
II. Differentiation

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Superior
handling of
incoming raw
materials so as
to minimize
damage and
to improve the
quality of the
final product

Consistent
manufacturing
of attractive
products

Rapid responses
to customers’
unique
manufacturing
specifications

Accurate and
responsive
order-
processing
procedures

Rapid and
timely product
deliveries
to customers

Extensive
granting of
credit buying
arrangements
for customers

Extensive
personal
relationships
with buyers
and suppliers

Extensive buyer train-
ing to assure high-
quality product
installations

Complete
field
stocking
of repla-
cement
parts

Systems and procedures used
to find the highest-quality
raw materials

Purchase of highest-quality
replacement parts

Strong capability in
basic research

Investments in technologies that will
allow the firm to produce highly
differentiated products

Compensation programs
intended to encourage worker
creativity and productivity

Highly developed information
systems to better understand
customers’ purchasing preferences

Somewhat extensive use of
subjective rather than
objective performance measures

A company-wide emphasis on
the importance of producing
high-quality products

Inbound logistics Operations Outbound logistics Marketing
and Sales

Service

Infrastructure

HRM

Technology
Development

Procurement

Superior
personal
training

Types of

:
• Rivalry against Customers are loyal purchasers of differentiated products

• i.e., Bose (electrical products-Headset)

• Bargaining Power of Buyers (Customers)
• Inverse relationship between loyalty/product: As loyalty increases, price sensitivity decreases
• i.e., Callaway golf clubs

• Bargaining Power of Suppliers
• Provide high quality components, driving up firm’s costs
• Cost may be passed on to customer

• P
• Substantial barriers (see above) and would require significant resource investment

• Product Substitutes
• Customer loyalty effectively positions firm against product substitutes

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Types of -Level Strategies

Competitive risks of the differentiation strategy
• Customers determine that the cost of differentiation is too great

• The means of differentiation may cease to provide value for which customers
are willing to pay

• Experience can narrow customers’ perceptions of the value of a product’s
differentiated features

• Counterfeiting/copying

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There are two “Focus” strategies
In general, the firms’ core competencies used to serve the
need of a particular industry segment or niche to the
exclusion of others.

• May lack resources to compete in the broader market

• May be able to more effectively serve a narrow market
segment than larger industry-wide competitors

• Firms may direct resources to certain value chain activities
to build competitive advantage

Large firms may overlook small niches

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Types of -Level Strategies
III. FOCUS LEADERSHIP

Focus strategy examples
Buyer groups

• Youths/senior citizens

Product line segments
• Professional painter groups

Geographic markets
• West vs. East coast

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Types of -Level Strategies
III. FOCUS LEADERSHIP

3. Focused Cost Leadership
• Competitive advantage: Low-cost
• Competitive scope: Narrow industry segment

4. Focused Differentiation
• Competitive advantage: Differentiation
• Competitive scope: Narrow industry segment

• i.e., in the outdoor recreation business a firm that caters to fly fishing is following
a focused differentiation strategy (as opposed to discount stores that carry
general fishing gear)
• High quality equipment
• Knowledgeable personnel

• Guided tours
• Fly tying classes

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Types of -Level Strategies
III. FOCUS LEADERSHIP

Types of -Level Strategies

Risks of using “Focus” strategies
• A competitor may be able to focus on a more narrowly defined competitive

segment and “outfocus” the focuser

• A company competing on an industry-wide basis may decide that the market
segment served by the focus strategy firm is attractive and worthy of
competitive pursuit

• Customer needs within a narrow competitive segment may become more
similar to those of industry-wide customers as a whole

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Types of -Level Strategies (Cont’d)

5. Integrated CL/Differentiation
• Efficiently produce products with differentiated attributes

• Efficiency: Sources of low cost

• Differentiation: Source of unique value

• Can adapt to new technology and rapid changes in external
environment

• Simultaneously concentrate on TWO sources of competitive advantage:
cost and differentiation – consequently…

• …must be competent in many of the primary and support activities

• Three sources of flexibility useful for this strategy

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Types of -Level Strategies (Cont’d)

Three flexible sources include
• Flexible manufacturing systems (FMS)

• Computer controlled process used to produce a variety of products in moderate,
flexible quantities with a minimum of manual intervention

• Goal: eliminate ‘low cost vs. product variety, tradeoff inherent in traditional
manufacturing technologies

• Information networks
• Using technology to link suppliers, distributors and customers

• Total Quality Management (TQM) systems

• Emphasizes firm’s total commitment to the customer and continuous
improvement of every process through data-driven, problem-solving
approaches based on empowering employees

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Types of -Level Strategies

Competitive Risks of Integrated Strategies
• Although becoming more popular the RISK is getting ‘stuck in the

middle’
• Cost structure is not low enough for attractive pricing of products and

products not sufficiently differentiated to create value for target customer
– therefore, fail to successfully implement either low cost or
differentiation strategy

• Result: Don’t earn above-average returns

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Summary

• -level strategy is an integrated set of actions to gain competitive advantage using cost
leadership, differentiation, focused cost leadership, focused differentiation or integrated cost
leadership/differentiation

• Customer segmentation allows firms to identify unique customer needs to serve through business-level
strategies.

• Cost leadership strategy involves low cost products with competitive levels of differentiation and
involves competitive risks

• Differentiation strategy involves products with different and valued features at a premium price, risks
include changes of customer valuation of the differentiated product or competitive substitutes

• Focus strategies serve the needs of a narrow competitive segment

• Integrated strategies provide both low cost products and differentiated valued features.