Business Level Strategy-Hitt

Ch4-1

Business-Level StrategyBusiness-Level Strategy

Ch4-2

Chapter 4

Business LevelStrategy

SustainableCompetitiveAdvantage

Chapter 2Chapter 2

External EnvironmentExternal Environment

Chapter 3Chapter 3Internal EnvironmentInternal Environment

Ch4-3

CoreCompetency

CoreCompetency

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


Ch4-4

StrategyStrategy

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

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

CoreCompetency


Ch4-5

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

Business Level Strategy

Business Level Strategy

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

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

CoreCompetency


Ch4-6

Generic Business Level Strategies

Cost Uniqueness

Source of Competitive Advantage

Breadth of Competitive

Scope

BroadTargetMarket

NarrowTargetMarket

Focused Differen-

tiation

Focused Differen-

tiation

CostLeadership

CostLeadership

Differen-tiation

Differen-tiation

Focused Low CostFocused

Low Cost

CostLeadership

Ch4-7

Key Criteria:Key Criteria:

Cost Leadership Business Level StrategyCost Leadership Business Level Strategy

Relatively standardized productsRelatively standardized products

Features acceptable to many customersFeatures acceptable to many customers

Lowest competitive priceLowest competitive price

Ch4-8

Requirements:Requirements:Constant effort to reduce costs through:Constant effort to reduce costs through:

Building efficient scale facilitiesBuilding efficient scale facilities

State of the art manufacturing facilitiesState of the art manufacturing facilities

Simplification of processesSimplification of processes

Minimizing costs of sales, R&D and serviceMinimizing costs of sales, R&D and service

Monitoring costs of activities provided by outsidersMonitoring costs of activities provided by outsiders

Tight control of production costs and overheadTight control of production costs and overhead

Cost Leadership Business Level StrategyCost Leadership Business Level Strategy

Ch4-9Primary Activities

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Technological Development

Human Resource Management

Firm Infrastructure

Procurement

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Value Creating Activities Common to a Cost Leadership Business Level StrategyValue Creating Activities Common to a Cost Leadership Business Level Strategy


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Firm Infrastructure

Procurement

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Cost Effective MIS Systems

Relatively Few Management Layers to Reduce Overhead

Simplified Planning Practices to Reduce Planning Costs

Consistent Policies to Reduce Turnover Costs

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset

Purchases

Efficient Plant Scale to Minimize Manufacturing Costs

Selection of Low Cost Transport Carriers

Delivery Schedule that Reduces Costs

National Scale Advertising

Products Priced to Generate Sales Volume

Small, Highly Trained Sales Force

Effective Product Installations to Reduce Frequency and Severity of Recalls

Easy-to-Use Manufacturing Technologies

Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes

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

Frequent Evaluation Processes to Monitor Suppliers’ Performances

Located in Close Proximity with Suppliers

Policy Choice of Plant Technology

Organizational Learning

Efficient Order Sizes

Interrelationships with Sister Units

Value Creating Activities Common to a Cost Leadership Business Level StrategyValue Creating Activities Common to a Cost Leadership Business Level Strategy

Ch4-11

How to Obtain a Cost AdvantageHow to Obtain a Cost Advantage

1. Determine and Control Cost Drivers1. Determine and Control Cost Drivers

2. Reconfigure the Value Chain as needed2. Reconfigure the Value Chain as needed

Alter production processAlter production process

Change in automationChange in automationNew distribution channelNew distribution channel

Direct sales in place of indirect salesDirect sales in place of indirect sales

New advertising mediaNew advertising media

New raw materialNew raw material

Backward integrationBackward integrationForward integrationForward integration

Change location relative to suppliers or buyersChange location relative to suppliers or buyers

Ch4-12

Reconfiguring the Value Chainof Iowa Beef Packers (IBP)

Reconfiguring the Value Chainof Iowa Beef Packers (IBP)

Ranch CattleRanch Cattle

Ship “on the Hoof” to Rail

Center (Chicago)

Ship “on the Hoof” to Rail

Center (Chicago)

Slaughter into sides

of beef

Slaughter into sides

of beef

“Boxed Cuts” at Markets

“Boxed Cuts” at Markets

Old Way:Old Way:

Save on shipping and cattle weight lossSave on shipping and cattle weight loss

Utilize cheaper non-union rural laborUtilize cheaper non-union rural labor

NewWayNew Way:New Way:

Locate large automated plants near

ranches

Locate large automated plants near

ranches

Process into “Boxed Cuts” at

plants

Process into “Boxed Cuts” at

plants

Ship cuts already

“Boxed” to Markets

Ship cuts already

“Boxed” to Markets

Ch4-13

Choices That Drive CostsChoices That Drive Costs

Economies of scale

Asset utilization

Capacity utilization pattern

Value chain linkages

Interrelationships

- Advertising & Sales- Logistics & Operations

- Seasonal, cyclical

- Order processing and distribution

Product features

Product features

Performance

Mix & variety of products

Service levels

Small vs. large buyers

Process technology

Wage levels

Hiring, training, motivation

Ch4-14

Three Key QuestionsThree Key Questions

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 distributorsGallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors

1. How can an activity be performed differently or even eliminated?

Ch4-15

Effective Cost Leaders can remain profitable even when the

Five Forces appear unattractive

Effective Cost Leaders can remain profitable even when the


Ch4-16

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”

**

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


Threat of New

Entrants

Threat of New

Entrants

Ch4-17


Enter at Large Scale to be Cost Competitive

*


*

Bargaining Power of Buyers


Threat of New

Entrants

Can mitigate Buyer Power by:Can mitigate Buyer Power by:

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

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



Ch4-18



*


*

Can mitigate Buyer Power by:

Threat of New

Entrants


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

Well positioned relative to Substitutes in order to:Well positioned relative to Substitutes in order to:

Make investments to create substitutes firstMake investments to create substitutes first

**

Buy patents developed by potential substitutesBuy patents developed by potential substitutes

**

Lower prices to maintain value positionLower prices to maintain value position

**

Threat of Substitute Products




Ch4-19



*


*

Well positioned relative to Substitutes in order to:

Make investments to create substitutes*

Can buy patents developed by potential substitutes

*

Lower prices to maintain value position

*

Bargaining Power of Suppliers


Threat of New

Entrants





Can mitigate Supplier Power by:Can mitigate Supplier Power by:

Low cost position makes them better able to absorb cost increasesLow cost position makes them better able to absorb cost increases

**

More likely to make very large purchases which reduces chance of supplier powerMore likely to make very large purchases which reduces chance of supplier power

**



Ch4-20



Threat of New

Entrants





*


*

Well positioned relative to Substitutes in order to:

Make investments to create substitutes*

Can buy patents developed by potential substitutes

*

Lower prices to maintain value position

*

Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry

Rivalry Among Competing Firms

in Industry


in Industry




Can mitigate Supplier Power by:

Low cost position makes them better able to absorb cost increases

*

More likely to make very large purchases which reduces chance of supplier power

*

Ch4-21

Major Risks of Cost LeadershipBusiness Level Strategy

Major Risks of Cost LeadershipBusiness 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

Ch4-22


Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

CostLeadership

Uniqueness

Generic Business Level StrategiesGeneric Business Level Strategies

Ch4-23


Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

CostLeadership

Differen-tiation

Differen-tiation


Uniqueness

Ch4-24

Key Criteria:Key Criteria:

Differentiation Business Level StrategyDifferentiation Business Level Strategy

Value provided by unique features and value characteristicsValue provided by unique features and value characteristics

Command premium priceCommand premium price

Superior qualitySuperior quality

Rapid innovationRapid innovation

Prestige or exclusivityPrestige or exclusivity

High customer serviceHigh customer service

Ch4-25


Requirements:

Constant effort to differentiate products through:

Developing new systems and processes

Quality focus

Maximize Human Resource contributions through low turnover and high motivation

Capability in R&D

Shaping perceptions through advertising


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Value Creating Activities Common to a Differentiation Business Level Strategy

Ch4-27



Firm Infrastructure

Procurement

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A companywide emphasis on producing high quality products

Highly Developed Information Systems to better understand customers’ purchasing preferences

Compensation programs intended to encourage worker creativity and productivity

Extensive use of subjective rather than objective performance measures

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

Rapid responses to customers unique manufacturing specifications

Consistent manufacturing of attractive products

Accurate and responsive order processing procedures

Complete field stocking of replacement parts

Strong capability in basic research

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

Purchase of highest quality replacement parts

Rapid and timely product deliveries to customers

Superior personnel training

Coordination among R&D, product development and marketing

Extensive personal relationships with buyers

Strong Coordin-ation among functions in R&D, Marketing and Product Development

Premium Pricing

Primary Activities

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Value Creating Activities Common to a Differentiation Business Level Strategy

Ch4-28

Effectiveness with Differentiation grows out of Value Chain activitiesEffectiveness with Differentiation

grows out of Value Chain activities

Examples:

Heineken beerHeineken beer Raw materialsRaw materials

Caterpillar tractorsCaterpillar tractors Service buyers’ needs quickly anywhere in the worldService buyers’ needs quickly anywhere in the world

Intel microprocessorsIntel microprocessors Technological superiorityTechnological superiority

Steinway pianosSteinway pianos Raw materials & Workmanship Raw materials & Workmanship

Mercedes Benz autosMercedes Benz autos Technology and WorkmanshipTechnology and Workmanship


Ch4-29

• Creating barriers by perceptions of uniqueness• Creating barriers by perceptions of uniqueness

• Creating switching costs through differentiation• Creating switching costs through differentiation

Raising Buyers’ Performance

Lowering Buyers’ Costs

Creating Sustainability through:

Create Value with Differentiation by:Create Value with Differentiation by:

Ch4-30

Drivers of DifferentiationDrivers of Differentiation

Unique product featuresUnique product features

Unique product performanceUnique product performance

Exceptional servicesExceptional services

Quality of inputsQuality of inputs

New technologiesNew technologies

Exceptional skill or experienceExceptional skill or experience

Detailed informationDetailed information

Examples:

Ch4-31

Effective Differentiators can remain profitable even when the


Effective Differentiators can remain profitable even when the


Ch4-32

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

Threat of New

Entrants

Threat of New

Entrants

Can fend off New Entrants because:

New products must surpass proven products

*

Or be equal to performance at lower prices

*

Ch4-33

Can mitigate Buyer Power because:Can mitigate Buyer Power because:

Well differentiated products reduce customer sensitivity to price increases Well differentiated products reduce customer sensitivity to price increases

Bargaining Power of

Buyers

Bargaining Power of

Buyers

Threat of New

Entrants



*


*


Ch4-34

Threat of New

Entrants



*


*


Well positioned relative to Substitutes because:Well positioned relative to Substitutes because:

Brand loyalty tends to reduce new product trial and brand switching


**



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


Ch4-35



Threat of New

Entrants



*


*





Well positioned relative to Substitutes because:


*

Can mitigate Supplier Power by:Can mitigate Supplier Power by:

Absorbing price increases due to higher marginsAbsorbing price increases due to higher margins

**

Passing on higher supplier prices because buyers are brand loyalPassing on higher supplier prices because buyers are brand loyal

**

Ch4-36


in Industry


in Industry

Threat of New

Entrants




Well positioned relative to Substitutes because:


*

Can mitigate Supplier Power by:

*

*

Absorbing price increases due to higher margins

Passing on higher supplier prices because buyers are brand loyal





*


*

Brand loyalty overcomes much price competition

Brand loyalty overcomes much price competition

Ch4-37

Customers may decide that the cost of “uniqueness” is too greatCustomers may decide that the cost of “uniqueness” is too great

The means of uniqueness may no longer be valued by customersThe means of uniqueness may no longer be valued by customers

Competitors may learn how to imitate Value ChainCompetitors may learn how to imitate Value Chain

Major Risks of a DifferentiationBusiness Level Strategy

Major Risks of a DifferentiationBusiness Level Strategy

Ch4-38


Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

CostLeadership

Differen-tiation

Differen-tiation

Uniqueness


Ch4-39


Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

CostLeadership

Differen-tiation

Differen-tiation

Focused Differen-

tiation

Focused Differen-

tiation


Low Cost

Uniqueness


Ch4-40

Focused Business Level Strategies involve the same basic approach as Broad Market Strategies.

However, opportunities may exist because:However, opportunities may exist because:

Focused Business Level StrategiesFocused Business Level Strategies

Large firms may overlook small nichesLarge firms may overlook small niches

Firm may lack resources to compete industry-wideFirm may lack resources to compete industry-wide

May be able to serve a narrow market segment more effectively than industrywide competitorsMay 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 advantageFocus can allow you to direct resources to certain value chain activities to build competitive advantage

Ch4-41

Bang & OlufsenBang & Olufsen Upscale electronic componentsUpscale electronic components

Iams CompanyIams Company Premium pet foodsPremium pet foods

Snap-on toolsSnap-on tools High quality mechanics’ toolsHigh quality mechanics’ tools

Focused Business Level StrategiesFocused Business Level StrategiesFocused Business Level Strategies involve the same basic approach as Broad Market Strategies.

However, opportunities may exist because:However, opportunities may exist because:

Examples:

May be able to retrofit old factories to keep costs downMay be able to retrofit old factories to keep costs down

Minimize R&D costs by copying innovatorsMinimize R&D costs by copying innovators

Ch4-42

Firm may be “outfocused” by competitorsFirm may be “outfocused” by competitors

Large competitor may set its sights on your niche marketLarge competitor may set its sights on your niche market

Preferences of niche market may change to match those of broad marketPreferences of niche market may change to match those of broad market

Major Risks Involved With a FocusedDifferentiation Business Level StrategyMajor Risks Involved With a Focused

Differentiation Business Level Strategy

Ch4-43


Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

CostLeadership

Differen-tiation

Differen-tiation


Focused Differen-

tiation

Focused Differen-

tiation


Low Cost

Integrated Low Cost/

Differentiation

Integrated Low Cost/

Differentiation

Uniqueness

Ch4-44

Firms using an Integrated Strategy may:Firms using an Integrated Strategy may:

Integrated Low Cost/Differentiation StrategyIntegrated Low Cost/Differentiation Strategy

Utilize Flexible Manufacturing Systems to create differentiated products at low costsUtilize Flexible Manufacturing Systems to create differentiated products at low costs

Adapt more quicklyAdapt more quickly

Learn new skills and technologiesLearn new skills and technologies

Leverage core competencies through Information Networks across multiple business unitsLeverage 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

Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs

Ch4-45

Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise

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

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


Ch4-46

Southwest AirlinesSouthwest Airlines


Use a single aircraft model(Boeing 737)

Use secondary airports

Fly short routes

15 minute turnaround time

No meals

No reserved seats

No travel agent reservations

Low Cost

Focus on customer satisfactionFocus on customer satisfaction

New flight services for business travelers(phones and faxes)

New flight services for business travelers(phones and faxes)

High level of employee dedicationHigh level of employee dedication

DifferentiationDifferentiation

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