Increasingly Important To A Firm’s Success

Introduction Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives. Choices dictated by: o External environment (Opportunities and Threats) o Internal resources, capabilities and core competencies (Strengths and Weaknesses) Business level-strategy - Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in a specific product markets or industry Responsibility of business level managers How a firm intends to compete in an individual product market or industry All firms must develop and implement business level strategy Single business firms compete in one industry and have one business level strategy Multi-business firms compete in multiple industries and have a separate business level strategy for each business unit or industry they compete in Business level strategy must be consistent with the firms internal and external environments Business-Level Strategies Purpose: To create differences between position of a firm and its competitors (think strategic group map from Module 3) Firm must make a deliberate choice to: o Perform activities differently (low cost) o Perform different activities (differentiation) Impacts how value chain activities will be performed to create unique value No strategy better than others Contingent on internal and external environment Competitive Advantage and Scope Two types of competitive advantage firms must choose between: o Having Lower Cost than rivals (performing activities differently) o The ability to Differentiate and command a premium price that exceeds the extra cost of doing so (performing different activities) Two types of competitive scope firms must choose between: o Broad target - competing industry wide o Narrow target - serving the needs of a narrow customer group Five Business-Level Strategies Competitive advantage and competitive scope combine to yield 5 Business-Level Strategies These are the five strategic options that firms have for competing in a particular industry or product market Can potentially be used by any organization competing in any industry None is inherently or universally superior to the other Choice is contingent on the firms internal and external environment Cost Leadership Strategy Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to those of competitors Low cost competitive advantage and broad competitive scope Sell no-frills, standardized or commodity-like products and services Must have competitive levels of differentiation (quality, service, and other features) Must have lowest overall costs relative to competitors to have the low cost advantage in an industry Low cost firms focus on process innovations (versus product innovations) Can be achieved by continuously reduce the costs / increase the efficiency of value chain activities Firms must develop capabilities and core competencies that support the cost leadership strategy (see Figure 4.2) Cost Leadership and the Five Competitive Forces Having a low cost advantage gives a firm a built in defense against all 5 competitive forces It also gives the firm the ability to compete based on costs and prices Existing Rivalry Because of the cost leaders advantageous position, rivals hesitate to compete on the basis of price Bargaining Power of Buyers (Customers) Powerful buyers can force a cost leader to reduce its prices, but not below the level at which the cost leader's next most efficient industry competitor can earn average returns Bargaining Power of Suppliers Because of the cost leaders higher profit margins, they can more easily absorb suppliers price increases than their competitors Potential Entrants Efficiency enhances profit margins and can serve as a significant barrier to entry to potential competitors Product Substitutes When faced with possible substitutes the cost leader has more flexibility than its competitors and can reduce its prices Competitive Risks of the Cost Leadership Strategy Innovations by competitors can quickly eliminate cost advantage Too much focus on cost reduction versus competitive levels of differentiation Competitors may learn how to successfully imitate the cost leader's strategy Differentiation Integrated set of actions taken to produce or deliver goods or services at an acceptable cost that customers perceive as being different/unique in ways that are important to them Differentiation/uniqueness competitive advantage and broad competitive scope Sell nonstandardized distinctive products and services Targeted customers perceive product value Must be able to produce differentiated products at competitive costs Must differentiate in ways that are important to customers such that they are willing to pay a price premium for the product or service The costs to differentiate should be less than the additional amount of money that customers are willing to pay for the product Can differentiate in many ways and in many value chain areas o Quality, service, image, reputation, unusual features, technological leadership, performance, etc. Differentiated firms focus on product innovations (versus process innovations) Firms must develop capabilities and core competencies that support the differentiation cost leadership strategy (see Figure 4.3) Differentiation and the Five Competitive Forces Having a differentiation advantage gives a firm a built in defense against all 5 competitive forces Existing Rivalry Customers tend to be loyal purchasers of products differentiated in ways that are important to them Bargaining Power of Buyers (Customers) The distinctiveness of differentiated goods or services reduces customer’s sensitivity to price increases Bargaining Power of Suppliers Higher margins can insulate firms from higher supplier prices Higher supplier prices can be passed on customers Potential Entrants Customer loyalty and the need to overcome the uniqueness of a differentiated product create substantial barriers to potential entrants Product Substitutes Customer loyalty effectively positions firm against product substitutes Competitive Risks of the Differentiation Strategy Can charge too high of a price premium Differentiation theme no longer valuable to customers Over-differentiating o Customer experience shows differentiation not worth the cost Counterfeiting Focus Strategies An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment or niche to the exclusion of others Cost leadership or differentiation competitive advantage and narrow competitive scope Attractive when: o Firm lacks resources to compete in the broader market o Firm may be able to more effectively serve a narrow market segment than larger industry-wide competitors o Niche is attractive o Larger firms may overlook small niches Focused Cost Leadership Cost leadership competitive advantage and narrow competitive scope Examples: Motel 6, Kia, IKEA Focused Differentiation Differentiation competitive advantage and narrow competitive scope Examples: Ritz-Carlton, Apple, Rolls Royce, Trader Joe's Examples of Specific Market Segments that can be Targeted A particular buyer group o Youths, senior citizens, women Different segments of a product line o Professional painters versus the do-it-yourself group o Casual versus professional athletes Different geographic markets o West coast vs. East coast o Northern versus Southern Italy Competitive Risks of Focus Strategies Same basic risks as broad cost leadership or broad differentiation plus: A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole Integrated Cost Leadership/Differentiation Involves engaging in primary value chain activities and support functions that allow a firm to simultaneously pursue low cost and differentiation Efficiently produce products with some differentiated features o Efficiency production is the source of low costs o Differentiation is the source of unique value Strives to be the low cost provider of a product or service with upscale attributes Offers more value for the money or a "bigger bang for the buck" Often called a best-cost or hybrid strategy Examples: Toyota, Target Risks of Integrated Strategies Harder to implement than other strategies Must simultaneously reduce costs while increasing differentiation Can get ‘stuck in the middle’ resulting in no advantages and poor performance The Relative Nature of Business-Level Strategies Competitive advantages are always relative to other firms as are the capabilities and core competencies that they are based on To have a competitive advantage and achieve above average returns: o Cost leaders must have the lowest overall costs o Differentiated firms must have higher levels of differentiation Having the same level of costs and/or differentiated features as a competitor is unlikely to lead to a competitive advantage over them in that area Other Strategies at the Business-Level Strategic Alliances and Partnerships (Chapter 9) Mergers and Acquisitions (Chapter 7) Vertical Integration (Chapter 6) Outsourcing (Chapter 3) Offensive and Defensive Strategies (Chapter 5) First-Mover Advantages and Disadvantages (Chapter 5) Business Model Functional Area Strategies Customer Relationships and Business-Level Strategy Business-level strategy is all about attracting and pleasing customers and positioning the firm in the marketplace Strategic competitiveness results when firm can satisfy customers by using its competitive advantages. Five components in customer relationships: 1. Effectively managing relationships w/ customers A. Deliver superior value and build customer loyalty 2. Reach, richness and affiliation Access and connection to customers, depth and detail of information, and facilitating interactions with customers 3. Who: Determining the customers to serve 4. What: Determining which customer needs to satisfy 5. How: Determining core competencies necessary to satisfy customer needs Definitions: Business -level strategy- an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. Reach, richness, and Affiliation- Reach- critical dimension for social networking sites (FB), richness- 2nd dimension of firm’s relationships with customers, concerned with the depth and details of the two-way flow of information between firm and customer (Amazon), affiliation, 3rd dimension, concerned with facilitating useful interactions with customers (Tesco) Market segmentation- is a process used to cluster people with similar needs into individual and identifiable group Cost leadership strategy- an integrated set of actions taken to produce goods or services with features that are acceptable to customers that the lowest cost, relative to that of competitors. Differentiation strategy- an integrated set of action taken to produce goods or services (at an acceptable cost) that customers perceived as being different in ways that are important to them. Focus strategy- is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. Integrated cost leadership/differentiation strategy- involves engaging in primary value-chain activities, and support functions that allow a firm to simultaneously purse low cost and differentiation. Total quality management (TQM)- managerial process that emphasizes an organization’s commitment to the customer and to continuous improvement of all processes through problem-solving approaches based on empowerment of employees. SA: 1.When selecting a business level strategy, the firm must determine all of the following EXCEPT A. Why should these customers' needs be satisfied? 2. Business-level strategies are concerned specifically with A. creating differences between the firm's position and its competitors. 3. A company using a narrow scope in its business strategy is A. limiting the group of customer segments served. 4. A cost leadership strategy targets the industry's ____ customers. A. most typical 5. A firm successfully implementing a differentiation strategy would expect A. to charge premium prices. 6. When implementing a focus strategy, the firm seeks to A. serve the specialized needs of a market segment. 7. The integration of a cost leadership and a differentiation strategy A.is challenging because the firm must become competent in more primary and support activities. 8. The term "stuck in the middle" A. means that the firm's cost structure is not low enough to allow it to attractively price its products and that its products are not sufficiently differentiated to create value for its target customer. Q1. Business-level strategies detail commitments and actions taken to provide value to customers and gain competitive advantage by exploiting core competencies: A. in specific product markets. Q2.Using Internet technology and e-commerce to increase information volume, Amazon has built a cost effective capability around information exchanges with its customers. This represents which of the three dimensions of service? A. richness Q.3.In order to meet and exceed customer expectations, firms must: A. continuously improve, innovate, and upgrade their core competencies. Q4. Value creating strategies satisfy customer needs through: A. core competencies. Q5. A company using a business strategy with a narrow scope: A. seeks to limit the group of customer segments served. Q6.An effective cost leader seeks to continually improve levels of efficiency to enhance profit margins. Which of the following elements of industry structure does this affect most directly? A. potential entrants Q7. A service that is effectively differentiated from that offered by rivals has qualities that are: A. perceived by the customer to add value for which they are willing to pay a premium. Q8.Which of the following is NOT a common risk associated with the differentiation strategy? A. Suppliers of raw materials erode a firm's profit margin with price increases. Q9 Focus strategies: A. face different types of risks than industry-wide strategies. Q10.The business strategy that benefits the most from investments in TQM is: A. integrated costleadership/differentiation. Q11. When a product's unique attributes provide value to customers, the firm is implementing: A.a differentiation strategy. Q12. The ________ dimension of relationships with customers is particularly important for social networking sites such as Facebook and MySpace. A. reach. Q13. A differentiation strategy can be effective in controlling the power of substitutes in an industry because: A. customers develop brand loyalty. Q14. A company pursuing the differentiation or focused differentiation strategy would tend to: A. have strong capabilities in basic research. Q15. TQM is most helpful to firms following the ________ business strategy. A. integrated cost-leadership/differentiation Q16. The term "stuck in the middle": A.means that the firm's cost structure is not low enough to allow it to attractively price its products and that its products are not sufficiently differentiated to create value for its target customer. Q17. The use of a differentiation strategy would be expected to be LEAST effective in which of the following markets? A. Commodity goods Q18. The three dimensions of a firm's relationships with customers include all the following EXCEPT: A. exclusiveness. Q19. Business-level strategies detail commitments and actions taken to provide value to customers and gain competitive advantage by exploiting core competencies in: A. specific product markets. Q20. By linking companies with their suppliers, distributors, and customers, ________ provide a company with flexibility. A. information networks Q1. An integrated and coordinated set of commitments and actions designed to exploit core competencies and gain competitive advantage in a specific product market is a definition of: A. business strategy. Q2. The ________ dimension of relationships with customers has to do with the firm's access to and connection to its customers. A. reach Q3. Clustering people with similar needs into individual and identifiable groups is called: A. market segmentation. Q4. Which of the following statements is TRUE? A. Any human characteristic can be the basis for market segmentation. Q5. The trend among U.S. middle-market consumers is that: A. price and value-for-the money is the driving factor in their purchases. Q6. Firms use their ________ to implement value-creating strategies and to meet customer needs. A. core competencies Q7. Examination of Southwest Airlines' ________ shows its tightly integrated activities that make it difficult for competitors to imitate its cost leadership/differentiation strategy. A. activity map Q8. The difference between the cost-leadership and the differentiation strategy and the focused cost leadership and the focused differentiation strategy is their: A. competitive scope. Q9. Wal-Mart follows a cost leadership strategy. This strategy offers goods or services with features that are: A. acceptable to customers. Q10. The most important activity on the value chain for firms competing on the basis of cost is: A. logistics. Q11. In a company using the cost leadership strategy, a human resources value-creating activity would be: A. training programs to improve employee efficiency. Q12. Mandeville Industrial Lubricants is the low-cost leader in its industry. The increasing price of petroleum has caused its cost of manufacturing to increase. As the low-cost leader, MIL may be able to maintain its above-average earnings by: A. absorbing the increased costs. Q13. ________ can force a cost leader to reduce its prices, but not below the level at which the cost leader's nextmost-efficient competitor can earn average returns. A. Customers Q14. The risks of a cost leadership strategy include all the following EXCEPT: A. firms following the integration strategy may undercut the firm's prices. Q15. Clinique Laboratories, Inc., offers make-up and skin care products that are hypoallergenic while still offering fashionable colors and features. Clinique's prices are similar to those of other "department store" cosmetic lines, but double or triple the costs of "drugstore" cosmetic lines. This is a differentiation strategy that provides products: A. for customers who value the product features more than they value low prices Q16. Brand loyalty is most likely to be found among customers of companies using the ________ strategy. A.differentiation Q17. As their loyalty to a brand ________, customer's sensitivity to price rises ________. A. increases, decreases Q18. The risks of the differentiation strategy include: A. customers deciding that the differentiated product features are not worth the price. Q19. Counterfeit products would be LEAST harmful to a company following the ________ strategy. A. cost-leadership Q20. Focus strategies are: A. associated with both cost leadership and differentiation strategies. Q21. A company limiting the group of customers that it serves is following a ________ strategy. A. focus Q22. You are the agent for an internationally-known, prestigious film star at the peak of his career. In order to maximize his earning potential, your client is willing to be the spokesman for an appropriate company's products (for a very large fee). You would have the best chance of placing your client if you target firms with the ________ strategy. A. focused differentiation Q23. Brinker's Dairy, a family-owned farm in the Midwest, is having difficulty competing with the large commercial dairies that dominate the wholesale milk market. Brinker's Dairy is considering taking a focus strategy. Which of the following actions would NOT be consistent with a focus strategy? A. Purchasing neighboring dairies in order to increase production and gain more market share. Q24. The activities needed to implement a cost leadership strategy ________ the activities needed to implement a focused cost leadership strategy. A. are virtually identical to Q25. A computer-controlled process that is used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention is called a/an: A. Flexible Manufacturing System. Q26. Which of the following systems would it be most useful for a small manufacturer of a line of innovative, highperformance, expensive recumbent bicycles to use? A. Total Quality Management Q27. Firms use ________ to increase customer satisfaction, cut costs, and reduce the amount of time required to introduce innovative products to the market. A. Total Quality Management Systems Q28. Customer relationship management: A. can be used to determine the trade-offs customers are willing to make between differentiation and cost. Q29. The generic business strategy that carries the most risk, especially if it does not establish a leadership position is: A. integrated cost leadership/differentiation strategy. Q30. When a firm following the integrated cost leadership/differentiation strategy fails to perform its primary and support activities in an optimal manner: A. it is "stuck in the middle."