Business Level Strategy Chapter 5 Built by Stambaugh/2009 The purpose of business is to create and...

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

mailto:[email protected]

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


■ 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?


Fundamental Questions


■ 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


Generic Strategies


■ Cost Leadership■ Differentiation■ Focus


Overall Cost Leadership


■ 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)


Overall Cost Leadership


Efficiency is key concept

Benefits / Risks of Cost Leadership


■ 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?


Differentiation


■ 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


Differentiation


Unique Value is key concept

Benefits / Risks of Differentiation


■ 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


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


■ Geographic■ Demographic■ Income scale (both high and low)■ Unique product requirements■ Risks

■ Competitor may “out-focus” you■ Your niche evaporates■ You over-focus


Combination Strategy(Integrated Cost and Differentiation)


■ 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


Risks of Combination Strategy


■ 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


How Well Do They Work?


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


What hath the internet wrought?


■ 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


Blue Oceans


■ 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)


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


Life Cycle Strategies


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


Life Cycle Strategies


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


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


■ 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)


Summary


■ 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”


Next Class


■ Test!■ Essay “question pool” online/WebCT (pick 3 of 4)■ One essay question based on news article■ Just bring enough paper to write your answers (blue

books not required)


Business Level Strategy Chapter 5 Built by Stambaugh/2009 The purpose of business is to create and...

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