Module 5 - Business-Level Strategies

LEARNING OBJECTIVES:

At the conclusion of this lesson, students should understand:

• Generic competitive strategies of cost leadership, differentiation, best cost, and focus, as well as
the way they are commonly executed.
• How competitive dynamics influence industries and the companies contained therein.
• Some of the most common competitive tactics firms pursue, including various growth strategies,
offensive tactics, defensive tactics, collaborative tactics, political tactics, avoidance (blue ocean)
tactics, and flexibility tactics.
• Strategies in an international context and over time.

CHAPTER TOPICS:

Business strategy is concerned with positioning an organization to grow and compete in its chosen markets.
This module addresses the generic business-level strategies of cost leadership, differentiation, best cost,
and focus. Tactics representing competitive dynamics are also discussed in detail, as are strategies in an
international context. The lesson concludes with a discussion of the industry life cycle and the relationship
between industry demand and competitive positioning.

LECTURE OUTLINE:

I. Opening Vignette—Wal-Mart

An obsession with cost helped Wal-Mart become the largest retailer in the world. The company developed
a highly efficient distribution system using large, strategically placed warehouses and technology. The size
of the company provided economies of scale, and Wal-Mart put pressure on its suppliers to drop their prices
so that the savings could be passed on to the consumer. Employees, called “associates,” were treated with
respect, although the company kept wages low to support its low-cost strategy.

When Sam Walton, Wal-Mart’s visionary founder, handed the reins over to David Glass in 1988, Glass
continued to guide the company in a cost leadership approach. Prior to his appointment as CEO, Glass was
famous for persuading Walton to invest in some highly effective inventory management technology that
became central to Wal-Mart’s emphasis on keeping costs low. Under the leadership of Glass, the company
continued to invest billions in cost-saving technologies. However, by the time Glass stepped down in 2000,
external stakeholders such as environmentalists and unions had helped to create an image for Wal-Mart as
an “evil empire.” Lee Scott, the new CEO, worked to transform Wal-Mart’s image, in part, through a
sustainability initiative that includes external environmental reporting and projects such as reusable grocery
bags.

In 2006 Scott began to move the company back toward its low-cost roots, which put Wal-Mart in an
excellent position to gain market share during the ensuing economic downturn. Given his successes at Wal-
Mart, Scott surprised many people by announcing his retirement in November 2008. Mike Duke, his
successor, was previously head of international operations. At the time of his appointment, Duke was
expected to continue in the direction set by his predecessor, including expanding Wal-Mart’s presence in
China and Russia to offset slow growth in the United States.

II. Generic Business-Level Strategies

A. Firms seek a competitive advantage through creating a strong value proposition by offering any of
the following:

1. Products or services that are different from those of competitors and those differences are valued by
customers.

2. Products or services that are standard, but produced at lower cost.

3. A combination of the first two options, a hybrid competitive strategy called “best cost.”

B. In differentiation strategies, the emphasis is on creating value through uniqueness, as opposed to

lowest cost.

1. Uniqueness can be achieved through product innovations, superior quality, superior service, creative
advertising, better supplier relationships, or in many other ways.

2. Customers must be willing to pay more for the uniqueness of a product or service than the firm paid
to create it.

3. Firms pursuing differentiation strategies can’t ignore their cost positions. When costs are too high
relative to competitors, a firm may not be able to recover enough of these additional costs through higher
prices.

C. Risks of a differentiation strategy include:

1. Customers may be willing to sacrifice some of the features, services, or image possessed by a unique
product or service because it costs too much.

2. Customers may no longer perceive an attribute as differentiating.

3. Successful differentiation will quickly become the target of imitative efforts by competitors. As
competitors imitate, the formerly differentiating features will become commodity characteristics.

D. Firms pursuing cost leadership set out to become the lowest cost providers of a good or service. The
broad scope of cost leaders means that they attempt to serve a large percentage of the total market. Firms
pursuing cost leadership include McDonalds and Panasonic. Generally, low-cost leadership allows a firm
to compete by lowering prices when needed without becoming unprofitable. A low-cost leader can also
price its products at the commodity or average industry price and reap larger profits than competitors.
E. To fully appreciate the significance of the low-cost leadership strategy, it is important to understand
the factors that underlie cost structures in firms.

1. High capacity utilization, through better demand forecasting, conservative capacity expansion policies,
or aggressive pricing, will help a firm maintain a lower-cost structure than a competitor of equal size and
capability.

2. Economies of scale are cost advantages associated with larger-sized facilities rather than with
increased volume through an existing facility.

3. Companies that make investments in technological advances are often trading an increase in fixed
costs for a reduction in variable costs.

4. The experience effect says that the time required to complete a task will decrease as a predictable
function of the number of times the task is repeated.

F. Companies that are able to achieve high capacity utilization, economies of scale, economies of
technology, and/or learning/experience effects may have lowest cost, but do not have to charge the lowest
price. In other words, a cost leader does not have to be a price leader.

G. There are several risks associated with too strong of a focus on a low-cost strategy.

1. Firms pursuing cost leadership may not detect required product or marketing changes because of a
preoccupation with cost.

2. These firms run the risk of making large investments in plants or equipment only to see them become
obsolete because of technological breakthroughs by competitors.

3. Efforts to seek low costs may just go too far, hurting safety or quality.

H. A best cost strategy involves a combination of low-cost leadership and differentiation. This is the
essence of a best cost strategy—finding a level of differentiation that will bring a premium price while
doing so at a reasonable cost.

1. In recent years, it has become apparent that many firms have been successful at pursuing cost
leadership and differentiation simultaneously. In some situations, the two strategies complement rather than
detract from each other.

I. Another element of a firm’s generic strategy is the extent to which it attempts to serve the needs and
wants of a particular segment of its market. This is called a focus strategy.

1. A focus strategy defines specific customers a firm attempts to serve, but it does not define how
they will be served.

2. Therefore, a firm that focuses will do so in combination with one of the other three approaches.
This being said, there are actually three types of focus strategies: focus through differentiation, focus
through low-cost leadership, and focus through best cost.
III. Competitive Tactics

A. This section examines the tactics firms engage in as they participate in give-and-take competition
with rivals.

B. One set of competitive tactics deals with the methods firms use to grow, or growth strategies. These
methods can be divided into internal and external growth strategies. Internal growth strategies include the
following:

1. Market penetration entails investing in advertising, capacity expansion, and/or the sales force with
the intent of increasing market share in the current business.

2. Both market development, in which the organization seeks new market segments, and applications
development, which involves creating new applications of its products, require a broadened definition of
the markets or functions served.

3. Product or service development seeks to modify existing products or develop new products or
services for the purpose of selling more to existing customers or creating new market segments.

C. External growth strategies involve investing organizational resources in another company or

business to achieve growth targets.

1. Horizontal integration involves the acquisition of an organization in the same line of business.
Typically, horizontal integration is accomplished for the purpose of gaining market share in a particular
market, expanding a market geographically, or augmenting product or service lines.

2. Many other forms of acquisitions can accomplish a variety of growth and diversification objectives.

3. Joint ventures or strategic alliances formed with other organizations are used to penetrate new
domestic or foreign markets, develop new products and services, or improve existing processes for
producing products and services.

D. Offensive tactics reduce the ability of rivals to compete. They include aggressive competition and
pursuing first-mover advantages.

1. Aggressive competition is illustrated by some firms that use their abundant resource positions to
overwhelm their rivals by rendering their countermoves ineffective.

2. Firms may also enjoy competitive advantages by being first movers in their industries.

E. Defensive tactics are not intended to overwhelm competitors, but to prevent them from engaging in
particular competitive behaviors in the first place.

1. Firms may threaten severe retaliation in an effort to prevent competitors from taking actions that
may be damaging to their own competitive positions. For this tactic to work, the threatening organization
must have sufficient resources to carry on with a competitive battle if it occurs.

2. Imitation is a very common competitive countermove because a “follower” organization can simply
learn from the leader. However, some firms attempt to create barriers to this sort of imitation. Many of the
barriers firms might erect to prevent imitation are similar to the barriers to entry discussed in Chapter 2,
except that barriers to imitation are intended to prevent the imitation of cost savings or sources of
differentiation, whereas entry barriers are intended to keep firms from entering the industry in the first
place.

F. Collaborations, another competitive tactic, can take various forms, including joint ventures,
organizational alliances, industry consortia, research groups, or trade unions.

1. Innovation networks are loosely coupled groups of firms that cooperate with each other and share
information. These firms tend to be organized around a hub firm that helps them coordinate their activities
and flows of information.

G. Political tactics include organizational activities that have the creation of a friendlier political climate
for the firm as one of their objectives.

H. An avoidance tactic means that firms avoid confrontation by focusing on a niche in the market in
which most other firms do not compete. This tactic is similar in concept to the focus strategy discussed
previously.

1. Another way to avoid competition is to create a new market space for your products and
services, or what is called a “blue ocean.” A blue ocean strategy utilizes a best cost generic strategy, a
combination of cost leadership and differentiation, but it is an attempt to do so in a completely unique way.

I. Tactics associated with strategic flexibility allow a firm to manage the amount of risk it faces while
earning a high return.

1. Firms pursuing such tactics can move their resources out of markets that are less-than-desirable in
a minimum of time and with as little loss as possible.

2. One way to remain strategically flexible is to avoid investments that have significant exit barriers.

IV. Strategies in an International Context

A. Firms should develop their core competitive strategies in their home environments before launching
them into other countries.

B. International expansion tactics include:

1. Exporting the products or services of the company to international markets.

2. Licensing the right to produce or sell the company’s products or services to another company in an
international market.

3. Franchising the rights to use the name and methods of the company in another country.

4. Forming a joint venture with an international partner in order to enter an international market.

5. Creating a wholly owned foreign subsidiary, sometimes referred to as a greenfield venture.

C. A multidomestic approach to international strategy involves custom tailoring products and services
to meet the needs of individual countries or regions.

D. A global approach makes the most sense when there is one global market for the product or service,
there are economic efficiencies associated with the global approach, and there are no external constraints
such as government regulation that prevents the global approach from being implemented.

E. A transnational approach combines the efficiencies of the global strategy with the local
responsiveness of the multidomestic strategy.

V. Changes in Strategy over Time

A. The industry life cycle describes how demand for a class of products or an entire industry changes
over its lifetime. The study of industry life cycle concepts can help an organization understand the dynamic
nature of strategy. As the industry moves through the stages of the life cycle, different strategies and
organizational resources are needed to compete effectively.

B. Understanding the industry life cycle not only helps an organization understand demand, but can also
help the organization formulate strategies.

1. In the introduction stage, firms attempt to produce a product that is of sufficiently high quality that
they will be able to establish a good reputation in the market. The emphasis is often on research and
development. Early producers sometimes enjoy a “first-mover advantage.”

2. During the growth stage, as demand greatly expands and the number of competitors increases,
existing competitors may attempt to erect entry barriers by building plants that are large enough to enjoy
economies of scale, locking in contracts for supplies or distribution of products, or differentiating products
through advertising and new features or service. At this stage, products are much more standardized and
competition tends to focus on product quality and availability.

3. During the maturity stage, as demand continues to level off, efficient, high volume production tends
to dominate manufacturing strategy. A dominant design for the product has probably emerged, and
therefore consumers typically focus on price and dependability. Product differentiation becomes
increasingly difficult. Marketing, distribution efficiency, and low-cost operations gain increasing
importance during this stage.

4. Finally, during the commodity or decline stage, tight cost controls leading to efficiency are essential
to success.

C. Organizations must recognize the signals that their industry is moving into a new stage and set strategic
direction to be compatible. For example, an organization may choose to align itself with the dominant
design and compete in the mainstream market or seek a niche that is distinctly different but possibly less
competitive.