Chapter 4

Business-Level Strategy

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

2000 South-Western College Publishing

Ch4-1

Chapter 2

External Environment

Chapter 3

Sustainable Competitive Advantage

Internal Environment

Chapter 4 Business Level Strategy

Ch4-2

Core Competenc y

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

Ch4-3

Core Competency

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

Strateg y

An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.

Ch4-4

Core Competency

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

Strategy

An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.

Business Level Strategy

Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets.
Ch4-5

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Focused Low Cost

Focused Differentiation
Ch4-6

Cost Leadership Business Level Strategy

Key Criteria:
Relatively standardized products Features acceptable to many customers Lowest competitive price

Ch4-7

Cost Leadership Business Level Strategy

Requirements:
Constant effort to reduce costs through: Building efficient scale facilities Tight control of production costs and overhead Minimizing costs of sales, R&D and service State of the art manufacturing facilities Monitoring costs of activities provided by outsiders Simplification of processes
Ch4-8

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Firm Infrastructure
Support Activities

Human Resource Management Technological Development

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Ch4-9

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

Consistent Policies to Reduce Turnover Costs

Human Resource Management Technological Development

Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Small, Highly Trained Sales Force Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Easy-to-Use Manufacturing Technologies

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Frequent Evaluation Processes to Procurement Monitor Suppliers Performances Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume National Scale Advertising

Operations

Outbound Logistics

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Logistics

Service

Highly Efficient Systems to Link Suppliers Products with the Firms Production Processes

Ch4-10

How to Obtain a Cost Advantage

1. Determine and Control Cost Drivers

2. Reconfigure the Value Chain as needed

Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales New raw material Forward integration Backward integration Change location relative to suppliers or buyers

Ch4-11

Reconfiguring the Value Chain of Iowa Beef Packers (IBP)

Old Way:
Ranch Cattle Ship on the Hoof to Rail Center (Chicago) Slaughter into sides of beef Boxed Cuts at Markets

New New Way: Way

Locate large automated plants near ranches

Process into Boxed Cuts at plants

Ship cuts already Boxed to Markets

Save on shipping and cattle weight loss Utilize cheaper non-union rural labor
Ch4-12

Choices That Drive Costs

Economies of scale Product features

Asset utilization
Capacity utilization pattern - Seasonal, cyclical Interrelationships - Order processing and distribution

Performance
Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation
Ch4-13

Value chain linkages - Advertising & Sales - Logistics & Operations

Three Key Questions

1. How can an activity be performed differently or even eliminated?
2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs?
Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors
Ch4-14

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive

Ch4-15

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
Threat of New Entrants

Can frighten off New Entrants due to the need to:

* Enter at large scale to be Cost Competitive * Take time to move down the Learning Curve
Ch4-16

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
Threat of New Entrants
Can frighten off New Entrants due to the need to: * Enter at Large Scale to be Cost Competitive * Take time to move down the Learning Curve

Can mitigate Buyer Power by:

* Driving prices far below competitors may cause exit and shift power back to firm

Bargaining Power of Buyers

Ch4-17

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Well positioned relative toThreat of New Substitutes in order to: Entrants * Make investments to create *
substitutes first Buy patents developed by potential substitutes
value position
Can frighten off New Entrants due to the need to: * Enter at Large Scale to be Cost Competitive * Take time to move down the Learning Curve

* Lower prices to maintain

Bargaining Power of Buyers

Can mitigate Buyer Power by: Driving prices far below competitors which may cause exit and shift power back to firm
Ch4-18

Threat of Substitute Products

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
Threat of New Entrants
Can frighten off New Entrants due to the need to: * Enter at Large Scale to be Cost Competitive * Take time to move down the Learning Curve

Bargaining Power of Suppliers

Can mitigate Supplier Power by:

* Low cost position makes them better able to absorb cost increases Well positioned relative to Can mitigate Buyer Power by:
Substitutes in order to:
Driving prices far * More likely to make very large purchases whichbelow Threat of competitors may Can buy patents developed by * which reduces chance Substitute of supplier power and shift power cause exit * Make investments to create substitutes potential substitutes * Lower prices to maintain value position

Bargaining Power of Buyers

Products

back to firm

Ch4-19

Effective Cost Leaders can remain profitable even when Competitors the Five Forces appear unattractive avoid price wars with Cost Leaders, which due Can mitigate Supplier Power by: Can frighten off New Entrants Threat of to the need higher profits createsto: Scale to be * Low cost position makes them New * Enter at Large better able to absorb cost increases Cost Competitive for entire industry Entrants * More likely to make very large
purchases which reduces chance of supplier power * Take time to move down the Learning Curve

Bargaining Power of Suppliers

Well positioned relative to Substitutes in order to:

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Can mitigate Buyer Power by:

* Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position

Threat of Substitute Products

Driving prices far below competitors which may cause exit and shift power back to firm
Ch4-20

Major Risks of Cost Leadership Business Level Strategy

Dramatic technological change could take away your cost advantage
Competitors may learn how to imitate Value Chain Focus on efficiency could cause Cost Leader to overlook changes in customer preferences
Ch4-21

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Narrow Target Market

Ch4-22

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Ch4-23

Differentiation Business Level Strategy

Key Criteria:
Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation
Ch4-24

Differentiation Business Level Strategy

Requirements:
Constant effort to differentiate products through: Developing new systems and processes Shaping perceptions through advertising Quality focus

Capability in R&D
Maximize Human Resource contributions through low turnover and high motivation
Ch4-25

Value Creating Activities Common to a Differentiation Business Level Strategy

Firm Infrastructure
Support Activities

Human Resource Management Technological Development

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Ch4-26

Value Creating Activities Common to a Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences

Firm Infrastructure
Extensive use of subjective rather than objective performance measures

A companywide emphasis on producing high quality products Superior personnel training Strong capability in basic research

Support Activities

Compensation programs intended to encourage worker creativity and productivity Coordination among R&D, product development and marketing

Human Resource Management Technological Development

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

Systems and procedures used to find the highest quality raw materials Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products

Purchase Procurementof highest quality replacement parts

Operations

Outbound Logistics

Rapid responses to customers unique manufacturing specifications

Extensive Rapid and timely personal product deliveries relationships to customers with buyers Premium Pricing

Primary Activities

Marketing & Sales

Inbound Logistics

Service

Accurate and responsive order processing procedures

Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

Ch4-27

Differentiation Business Level Strategy

Effectiveness with Differentiation grows out of Value Chain activities
Examples:

Heineken beer Steinway pianos Mercedes Benz autos Intel microprocessors Caterpillar tractors

Raw materials Raw materials & Workmanship Technology and Workmanship Technological superiority

Service buyers needs quickly anywhere in the world

Ch4-28

Create Value with Differentiation by:

Lowering Buyers Costs Raising Buyers Performance

Creating Sustainability through:

Creating barriers by perceptions of uniqueness Creating switching costs through differentiation

Ch4-29

Drivers of Differentiation
Examples:

Unique product features

Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information
Ch4-30

Effective Differentiators can remain profitable even when the Five Forces appear unattractive

Ch4-31

Effective Differentiators can remain profitable even when the Five Forces appear unattractive
Threat of New Entrants

Can fend off New Entrants because: * New products must surpass proven products * Or be equal to performance at lower prices
Ch4-32

Effective Differentiators can remain profitable even when the Five Forces appear unattractive
Threat of New Entrants
Can fend off New Entrants because: * * New products must surpass proven products Or be equal to performance at lower prices

Can mitigate Buyer Power because: Well differentiated products reduce customer sensitivity to price increases

Bargaining Power of Buyers

Ch4-33

Effective Differentiators can remain profitable even when the Five Forces appear unattractive
Threat of New Entrants
Can fend off New Entrants because: * * New products must surpass proven products Or be equal to performance at lower prices

Well positioned relative to Substitutes because:

* Brand loyalty tends to reduce new product trial and brand switching
Threat of Substitute Products

Bargaining Power of Suppliers

Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases
Ch4-34

Effective Differentiators can remain profitable even when the Five Forces appear unattractive
Threat of New Entrants
Can fend off New Entrants because: * * New products must surpass proven products Or be equal to performance at lower prices

Bargaining Power of Suppliers

Can mitigate Supplier Power by:

Bargaining * Absorbing price increases due to Power of higher margins
Well positioned relative to Substitutes because:

Suppliers

* Passing on higher supplier prices * Brand loyalty tends to because buyers are brand loyal reduce new product trial
and brand switching

Threat of Substitute Products

Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases
Ch4-35

Effective Differentiators can remain profitable even when the Five Forces appear unattractive
Can mitigate Supplier Power by: * * Absorbing price increases due to higher margins Passing on higher supplier prices because buyers are brand loyal

Threat of New Entrants

Can fend off New Entrants because:

Brand loyalty * New products must surpass proven much overcomes products * Or be equal to performance price competition at lower prices

Bargaining Power of Buyers

Rivalry Among Competing Firms in Industry

Bargaining Power of Suppliers

Well positioned relative to Substitutes because:

Brand loyalty tends to reduce new product trial and brand switching

Threat of Substitute Products

Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases
Ch4-36

Major Risks of a Differentiation Business Level Strategy

Customers may decide that the cost of uniqueness is too great

Competitors may learn how to imitate Value Chain

The means of uniqueness may no longer be valued by customers
Ch4-37

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Ch4-38

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Focused Low Cost

Focused Differentiation
Ch4-39

Focused Business Level Strategies

Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: Large firms may overlook small niches

Firm may lack resources to compete industry-wide

May be able to serve a narrow market segment more effectively than industrywide competitors Focus can allow you to direct resources to certain value chain activities to build competitive advantage
Ch4-40

Focused Business Level Strategies

Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: May be able to retrofit old factories to keep costs down Minimize R&D costs by copying innovators
Examples:

Bang & Olufsen

Snap-on tools Iams Company

Upscale electronic components

High quality mechanics tools Premium pet foods
Ch4-41

Major Risks Involved With a Focused Differentiation Business Level Strategy

Firm may be outfocused by competitors

Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market
Ch4-42

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Narrow Target Market

Cost DifferenLeadership tiation Integrated Low Cost/ Differentiation Focused Focused DifferenLow Cost tiation
Ch4-43

Integrated Low Cost/Differentiation Strategy

Firms using an Integrated Strategy may: Adapt more quickly Learn new skills and technologies

Utilize Flexible Manufacturing Systems to create differentiated products at low costs

Leverage core competencies through Information Networks across multiple business units Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs

Ch4-44

Integrated Low Cost/Differentiation Strategy

Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise The risk is that the firm may become Stuck in the Middle lacking a strong commitment to or expertise with either type of generic strategy

Ch4-45

Integrated Low Cost/Differentiation Strategy

Southwest Airlines
Low Cost Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes No meals 15 minute turnaround time No reserved seats Differentiation Focus on customer satisfaction High level of employee dedication

New flight services for business travelers (phones and faxes)

Ch4-46

No travel agent reservations