Building Competitive Advantage thru BUSINESS-LEVEL STRATEGY

Business 189

Spring 2010

Dr. Mark Fruin

WHAT IS BUS-LEVEL STRATEGY?• FIRM-SPECIFIC PLAN OF ACTION FOR GAINING

COMPETITIVE ADVANTAGE IN A MARKET OR INDUSTRY (TAKE BUSINESS FROM RIVALS)

• IMPLEMENT B-L STRATEGIES THAT MAKE FULL USE OF FUNCTIONAL LEVEL STRATEGIES

• INDUSTRIES = PRODUCT/MARKET SEGMENTS• BASED ON

– PRODUCT DIFFERENCES

– CUSTOMER GROUPS OR MARKET SEGMENTS

– LOCATION (SEGMENTS OFTEN DIFFER BY LOCATION)

– HAVING DISTINCTIVE COMPETENCES• FOLLOWING PORTER, COST LEADERSHIP OR

DIFFERENTIATION ADVANTAGES/THESE ARE PRODUCT-LEVEL STRAT

BL & FL STRATEGIES• DISTINGUISH BETWEEN BUSINESS LEVEL &

FUNCTIONAL LEVEL STRATEGIES– IS ONE MORE APPROPRIATE AT CERTAIN TIMES

& STAGES?– CAN BOTH BE PURSUED SIMULTANEOUSLY?– IS THE COMPETITION BETWEEN TOYOTA & GM

(AND NOW VW & FIAT) TO BE THE LARGEST AUTO MAKER IN THE WORLD, A BL OR FL COMPETITON?

COMPETITIVE POSITIONING• TO BE IN A POSITION OF COMPETITIVE

ADVANTAGE, A FIRM MUST MAKE CHOICES• PURSUE COST LEADERSHIP OR DIFFERENTIATION?

– WHAT PRODUCT FEATURES?

– WHAT CUSTOMER CHARACTERISTICS OR CUSTOMER GROUPINGS

– WHERE (WHEN & HOW)

– WILL PRODUCT BE COMPETITIVELY POSITIONED ACCORDING TO (WHAT IT TAKES TO SUCCEED WITH ONE IS SO DIFFERENT FROM THE OTHER)

• COST LEADERSHIP?

• DIFFERENTIATION?

SEGMENTATION STRATEGIES• FIGURE 5.2 (SEE FIGURE 5.1 AS WELL)• 3 MAIN APPROACHES

– NO MARKET SEGMENTATION - THE MARKET TAKEN AS AN UNDIFFERENTIATED WHOLE

– HIGH MARKET SEGMENTATION - LOTS OF DIFFERENT PRODUCT/MARKET SEGMENTS

• LOTS OF DIFF PRODUCTS FOR LOTS OF DIFF MKTS

– FOCUSED MARKET SEGMENTATION - A FEW SEGMENTS ARE SELECTIVELY TARGETED

• LOTS OF OTHERS ARE IGNORED (FOR NOW)

SEGMENTATION AND THE BUSINESS MODEL

• CHAPTER TALKS A LOT ABOUT BUSINESS MODELS RATHER THAN STRATEGIES

• WHAT’S THE DIFFERENCE AGAIN?• BM IS HOW ARE WE GOING TO MAKE MONEY• STRATEGY IS HOW ARE WE GOING TO

IMPLEMENT/EFFECT/PUT INTO PLACE BM• BUSINESS MODELS ARE EASY TO IMAGINE AND

OFTEN HARD TO EFFECT

WAL-MART’S BUSINESS MODEL• WAL-MART’S BUSINESS MODEL ON P. 151-52,

FIGURE 5.3• BALLOONS ARE ACTIVITIES/CAPABILITIES

THAT DISTINGUISH W-M’S BUSINESS MODEL AND PROD/MKT SEGMENTATION– WHICH BALLOONS HAVE THE MOST LINKS– WHY? WHAT DOES MORE LINKS MEAN?

• HOW ARE W-M’S CAPABILITIES IMPLEMENTED/PUT INTO PLAY???– FUNCTIONAL LEVEL STRATEGIES– GENERIC COMPETITIVE STRATEGIES

FIGURES 5.5, 5.6 & 5.8• ILLUSTRATE WHAT WE HAVE JUST SAID• BUSINESS-LEVEL STRATEGIES REQUIRE

– TARGET SEGMENTS (MAKE CHOICES)– CARRY OUT FUNCTIONAL LEVEL STRATEGIES

(STRATEGY STACK IN ACTION)• MAKE CHOICES

– DEVELOP (MOBILIZE) ACTIVITIES/CAPABILITIES THAT IMPLEMENT TARGETED SEGMENTS

• MAKE CHOICES

– EXCEL IN ONE OR ANOTHER GENERIC COMPETITIVE STRATEGY (MAKE CHOICES)

• AND BE EXCELLENT IN AT LEAST ONE FUNCTIONAL LEVEL STRATEGY AND PROBABLY MORE THAN ONE

GENERIC STRATEGIES

• COST LEADERSHIP (VALUE PROPOSITION STRATEGY)– BROAD– NARROW

• DIFFERENTIATION (PRICE PREMIUM STRATEGY)– BROAD – NARROW (FOCUS DIFFERENTIATION)

CUSTOMER GROUPS & MARKET SEGMENTATION

• HOW MUCH ARE CUSTOMERS WILLING TO PAY VERSUS WHICH CUSTOMERS ARE BEING SERVED?

• THREE ALTERNATIVE STRATEGIES– FOCUS ON “AVERAGE” CUSTOMER

– SEGMENT (DIVIDE) MARKET INTO MANY DIFFERENT CONSTITUENCIES/CLUSTERS

– CONCENTRATE ON “NICHES” ONLY• WHY DO THIS?

WILL COME UP LATER ON IN TEXT

• BUT I’LL BRING IT UP NOW

• YOU CAN BE TOO EARLY OR TOO LATE

• MODEL @ WHAT KIND OF CUSTOMERS LIKELY TO FIRST ENTER MARKETS– INNOVATORS (1%)– EARLY ADOPTERS (5%)– EARLY MAJORITY (24%)– LATE MAJORITY (45%)– LAGGARDS (24%)

CAN A FIRM OFFER TOO MANY PRODUCTS?

• HOW MANY PRODUCTS ARE THE “RIGHT” NUMBER OF PRODUCTS?

• INDUSTRY CYCLE EFFECTS• MACROECONOMIC EFFECTS• SIGNALS & SIGNS OF TOO FEW OR TOO MANY

PRODUCTS?– HOW MANY MODELS DO BOEING AND AIRBUS OFFER?

• TOO MANY/TOO FEW & WHY?

– RECENTLY GM REDUCED # OF MODELS OFFERED• A GOOD MOVE OR NOT & WHY?

ADVANTAGES & DISADVANTAGES OF C.L.

• ADVANTAGES– USING 5 FORCES MODEL: COST LEADER HAS

• MORE POWER RELATIVE TO SUPPLIERS• MORE POWER RELATIVE TO BUYERS• BETTER ABLE TO DETER ENTRY OF NEW COMPETITORS &

BATTLE SUBSTITUTE PRODUCTS (BY LOWERING PRICES)

• DISADVANTAGES– MORE LIKELY STUCK IN PARTICULAR TECH/SEGMNT

• WHY?

– MORE LIKELY TO BE IMITATED• WHY?

– MORE LIKELY STUCK IN C.L. STRATEGY (AND POSSIBLY LOSE SIGHT OF CHANGING CUST. TASTES)

• DISTRUPTIVE/DISCONTINUOUS INNOVATION (C. CHRISTENSEN)

ADVANTAGES & DISADVAN-TAGES OF DIFFERENTIATION

• ADVANTAGES– DIFFERENTIATORS TRY TO DIFFERENTIATE IN

MANY DIFFERENT WAYS– HARD TO IMITATE (IF DONE WELL)– BRAND LOYALTY HIGH IF CONVINCE BUYERS OF

“UNIQUENESS,” “UNUSUALNESS,” & “SPECIALNESS”

• DISADVANTAGES– DIFFERENTIATION IS EXPENSIVE– MANY DIFFERENTIATION FACTORS ARE EASILY

IMITATED– FOR HOW LONG CAN “UNIQUENESS” BE

SUSTAINED/PROTECTED

FOCUSED DIFFERENTIATION

• FD MEANS CONCENTRATING ON– A PARTICULAR AREA (GEOGRAPHICALLY)– A PARTICULAR CUSTOMER (WELL EDUCATED,

PART. HOUSEHOLD INCOME, ETC.– PARTICULAR MARKET SEGMENT, SUCH AS

DESIGNER CLOTHES, FAST CARS, SMALL FOOTPRINT APPLIANCES, ETC.

GENERIC STRATEGIES• REQUIRE CAREFUL ATTENTION TO

PRODUCT/TECH/MARKET CHOICES– LOOKING FOR THE SWEET SPOTS

• CAN PROTECT FIRMS FROM 5 FORCES RIVALRIES - WHY?

• REQUIRE CONTINUOUS UPGRADING OF INVESMENT CHOICES - WHY?

• CREATE STRATEGIC GROUPINGS (OF FIRMS FOLLOWING SAME STRATEGIES)

STRATEGIC GROUPS• WITHIN MOST INDUSTRIES, STRATEGIC

GROUP EMERGE

• A STRATEGIC GROUP IS DEFINED BY COMPANIES PURSUING THE SAME GENERIC STRATEGY

• MOBILITY BARRIERS INHIBIT THE MOVEMENT OF COMPANIES FROM ONE STRATEGIC GROUP TO ANOTHER

COMPETITIVE ADVANTAGE & INVESTMENT STRATEGY

• WHAT TYPE OF INVESTMENTS MUST FIRMS MAKE TO SUSTAIN COMPETITIVE ADVANTAGE?

• OBVIOUS– HUMAN RESOURCES, IT INVESTMENTS– FUNCTIONAL-LEVEL STRATEGIES– PURSUIT OF FINANCIAL ADVANTAGE– GLOBALIZATION & OUTSOURCING

• NOT SO OBVIOUS? – INTANGIBLE RESOURCES– TACIT CAPABILITIES– SOCIAL PROCESSES– HIGHER LEVEL HR INVESTMENTS

BUSINESS LEVEL INVESTMENT STRATEGIES

• COMPETITIVE POSITION BASED ON– MARKET SHARE– STRENGTH OF DISTINCTIVE COMPETENCIES

• (PRODUCT) LIFE CYCLE EFFECTS– EMBRYONIC, GROWTH, MATURE, DECLINE

• INDUSTRY CYCLE EFFECTS– EMBRYONIC, GROWTH, MATURE, DECLINE

INDUSTRIES NOT GOVERNED BY 5 FORCES & POSSIBLY

LIFE-CYCLE EFFECTS?• WHERE THERE ARE NO ECONOMIES OF SCALE

AND SCOPE• WHERE NO INDUSTRY CONCENTRATION

– CONCENTRATION RATIOS IN MATURE INDUSTRIES

• SO-CALLED FRAGMENTED “INDUSTRIES”– HAIRCUT, DRY CLEAN, NAIL SALON, SALOON,

POSSIBLY OTHER CONVENIENCE & SERVICE- ORIENTED BUSINESSES

GROWTH CYCLES(CONFUSION?)

• EMBRYONIC MAY INCLUDE EMBRYONIC AND EARLY EMERGING

• GROWTH MAY INCLUDE PLAIN OLD GROWTH (SOMETIMES CALLED EMERGING) AND SHAKEOUT GROWTH

• MATURE MAY INCLUDE PRODUCT DIFFERENTIATION & PROLIFERATION

• DECLINE ALSO INCLUDES CONSOLIDATION, CONCENTRATION & HARVEST (INCLUDE CASH COW STRAT)

• ALSO, ANDY GROVE’S “CROSSING THE CHASM”

INVESTMENT STRATEGY TYPES (MATCHED TO LIFE CYLE MODEL)

• TYPICAL STRATEGIES PURSUED AT DIFFERENT STAGES OF ILC– GROWTH

• SHARE BUILDING• GROWTH • SHARE INCREASING

– MATURE• HOLD-AND-MAINTAIN• PROFIT • MARKET CONCENTRATION

– DECLINING• ASSET REDUCTION• HARVEST• TURNAROUND• LIQUIDATE• DIVESTITURE

QUESTIONS• IN WHAT WAYS ARE FL & BL STRATS RELATED?

– # OF MODELS– PRODUCT DEVELOPMENT LEAD TIMES– DEGREE OF VERTICAL INTEGRATION & OUTSOURCING– OTHER??

• WHY DOES EACH GENERIC STRATEGY REQUIRE DIFFERENT SETS OF PRODUCT/MARKET/ DISTINCTIVE COMPETENCY CHOICES?– EXAMPLES OF FIRM PAIRS MAKING DIFFERENT

CHOICES; ARE THEY IN SAME STRATEGIC GROUP?• HONDA VS. TOYOTA• FORD VS GM

• HOW SHOULD INVESTMENT CHOICES VARY IF YOU ARE IN STRONG OR WEAK COMPETITIVE POSITION WHEN PURSUING C.L. & DIFF STRATS

STUDY GROUP QUESTIONS• WHICH FIRM (OF THE PAIR) PERFORMS BEST IN

TERMS OF FUNCTIONAL-LEVEL STRATEGIES?– FL STRATEGIES INDIVIDUALLY & TOGETHER

• DO THE TWO FIRMS BELONG TO THE SAME STRATEGIC GROUP IN THE INDUSTRY?

• DO BOTH FIRMS PURSUE THE SAME BL STRATEGIES? (TARGET THE SAME CUSTOMERS WITH SIMILAR PRODUCTS?)

• WHICH FIRM IS MORE PROFITABLE & WHY?– ARE FL OR BL STRATEGIES MORE IMPORTANT?

• USE “DUPONT” ROI FORMULA, pp. 94-95