BUSINESS LEVEL STRATEGY COMPETITIVE ADVANTAGE Dr Payne

BUSINESS LEVEL STRATEGY & COMPETITIVE ADVANTAGE Dr. Payne (6) 1

Definition of Competitive Advantage The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. - Gary Hamel and C. K. Prahalad • COMPETITIVE ADVANTAGE exists when a firm’s strategy gives it an edge in: Defending against competitive forces and – Securing customers – …such that the firm earns (or has the potential to earn) a persistently higher rate of profit. 2

Gaining of Competitive Advantage • COMPETITIVE ADVANTAGE comes with the offering of SUPERIOR VALUE through: –Offering buyers a good product at a lower price and/or with greater efficiency –Offering a better product/service buyers think is worth a premium price “Must perform activities differently than rivals” “Must perform different (and valuable) activities than rivals” 3

(The ability to identify and respond to opportunity lies in the core management capability called Entrepreneurship. ) 4

Business-Level Strategy • Coordinated set of commitments and actions that the firm uses to gain competitive advantage by exploiting core competencies in a specific market or industry. • B-L Strategy involves: – What good/service to offer customers – How to manufacture or create good/service – How to distribute the good/service to the marketplace Who to serve, what needs to satisfy, and how to satisfy them! 5

Mintzberg’s 5 Ps for Strategy has been used in a number of ways; recognizing these ways can help you navigate the different ways people use the concept/word. • • • Plan: Intended and purposeful course of action. Ploy: Specific maneuver or tactic. Pattern: Realized theme of activities and behaviors. Position: Fitting business within the context. Perspective: An ingrained way of perceiving the world. 6

The Decision Logic of Strategy Formulation May be Corporate or Business Strategic Decisions Establishment of mission, vision, values, objectives -- the Directional Strategies Identification, evaluation, and selection of -- the Adaptive Strategies Identification, evaluation, and selection of -- the Market Entry Strategies Identification, evaluation, and selection of -- the Positioning Strategies Implementation through development of -- the Functional & Operational Strategies 7

Adaptive Strategies • Delineate how the organization will adapt to changes in the environment or competitive landscape: Expansion • Diversification • Vertical Integration • Market Development • Product Development • Penetration Contraction • Divestiture • Liquidation • Harvesting • Retrenchment • Outsourcing Stabilization • Enhancement • Status Quo Corporate Strategy Decisions Only 8

Adaptive: Expansion-Market/Product Development & Penetration • Market Development -- expand geographic service area or by targeting new market segments within the present area. – Building new Home Depot Store in Mansfield near highgrowth area • Product Development -- introduction of new product/services in present markets, through product/service enhancement and line expansion. – X-Box Gaming System with new Games • Penetration -- centered on promotional, distribution, and pricing strategies with current products or services. – Coca-Cola “ 1 in 8 wins” promotions 9

The BCG Portfolio Matrix 22% Stars Question Marks 20% 16% 14% 12% 10% Cash Cows 8% Dogs 6% 4% 0. 1 X 0. 3 X 0. 2 X Relative Market Share 0. 4 X 0. 5 X 1 X 1. 5 X 2 X 0 4 X 2% 10 X Business Growth Rate 18% 10

Adaptive: Stabilization Strategies When past strategies have been viewed as appropriate and few changes are required: • Enhancement - when organization just “needs to do things better; ” takes forms of CQI, TQM programs, speeding delivery, adding flexibility to service design • Status Quo - maintenance of services at the current levels, defending against competitors 11

Market Entry Strategies • Carry out the expansion and stabilization strategies through: – Purchase Strategies: May be Corporate Decision if in Different Market • Acquisition – purchase of new product, unit or organization • Licensing – lease technology, product or service • Venture Capital Investment – “try out” investment option – Cooperation Strategies: • Mergers – two organizations come together as one • Strategic Alliance – long-term agreement to work together • Joint Venture – combined resources to work on common issue of interest – Developmental Strategies: • Internal Development – uses existing resources or structures • Internal Ventures – establishes new entity for developmental purposes 12

Positioning Strategies • Business Level Issues: – Position the organization vis-à-vis other organizations within the market – These are market oriented and best articulate the competitive advantage within the market – May be market-wide (or broad-based) or directed at a particular segment (or niche-focused) • Based largely on Generic Business Strategies: – – – Low-Cost Leadership Strategy Broad Differentiation Strategies Best-Cost Provider Strategies Focused Low-Cost Strategies Focused Differentiation Strategies 13

“Three” Generic Strategies Competitive Advantage Lower Cost Differentiation Industry. Wide Cost Leadership Differentiation Competitive Scope Single Segment Focus 14

“Four” Generic Strategies Competitive Advantage Lower Cost Differentiation Broad Target Cost Leadership Differentiation Competitive Scope Narrow Target Cost Focus Differentiation Focus 15

“Five” Generic Strategies Competitive Advantage Lower Cost Differentiation Broad Target Competitive Scope Narrow Target Cost Leadership Differentiation Best Cost Provider Cost Focus Differentiation Focus 16

A Low-Cost Leadership Strategy Objective • Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to: – – Under-price rivals and reap market share gains OR Earn higher profit margin selling at going price Keys to Success Make achievement of low-cost relative to rivals the THEME of firm’s business strategy • Find ways to drive costs out of business year-after-year • Characteristics • • • Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement 17

Drivers of Cost Advantage • Economies of Scale – Volume of Production – Specialization • Economies of Learning (i. e. , Learning Curve) – Increased Dexterity – Improved Coordination and Organization • Process Technology and Process Design – Mechanization and Automation – Efficient Utilization of Materials – Increased Precision • Product Design – Design for Automation – Designs to Economize on Materials • Input Costs – – Location Advantages Ownership of Low-Cost Inputs Bargaining Power Supplier Cooperation • Capacity Utilization – Ratio of Fixed to Variable Costs – Costs of Installing and Closing Capacity • Managerial / Organizational Efficiency – Organizational Slack 18

A Low-Cost Strategy Works Best When: • • • Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power 19

A Low-Cost Strategy Fails When: Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume--profits go down, not up) • Low cost methods are easily imitated by rivals • Becoming too fixated on reducing costs and ignoring • – – – • Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used Technological breakthroughs open up cost reductions for rivals There also “Diseconomies of Scale”! Sources include: 1) 2) 3) 4) Physical Limits to Efficient Size Managerial Diseconomies Worker Motivation Distance to Markets and Suppliers 20

A Differentiation Strategy Objective • Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals Keys to Success Find ways to differentiate that CREATE VALUE for buyers and that are NOT EASILY MATCHED or CHEAPLY COPIED by rivals • Not spending more to achieve differentiation than the price premium that can be charged • Characteristics • Uniqueness is achieved in ways that: – – – Buyers perceive as valuable Rivals find hard to match or copy Can be incorporated at a cost well below the price premium that buyers will pay 21

Examples of Differentiation Themes 22

A Differentiation Strategy Works Best When: There are many ways to differentiate a product that have value and please customers • Buyer needs and uses are diverse • Few rivals are following a similar type of differentiation approach • Technological change is fast-paced and competition is focused on evolving product features • 23

A Differentiation Strategy Fails When: • • • Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being Over-differentiating such that product features exceed buyers’ needs Charging a price premium that buyers perceive is too high Failing to signal value Not understanding what buyers want or prefer and differentiating on the “wrong” things 24

A Best Cost Provider Strategy Objective • Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation – Make an upscale product at a lower cost – Give customers more value for the money Keys to Success Create superior value by MEETING OR EXCEEDING buyer expectations on product attributes and BEATING their price expectations • Be the low-cost producer of a product with GOOD-TOEXCELLENT product attributes, then use cost advantage to UNDERPRICE comparable brands • 25

A Focus / Niche Strategy Objective Involves concentrated attention on a narrow piece of the total market • Serve niche buyers better than rivals • Keys to Success Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs • Develop unique capabilities to serve needs of target buyer segment • Two Types • Achieve LOWER COSTS than rivals in serving the segment-- A low-cost strategy • Offer niche buyers SOMETHING DIFFERENT from rivals-- A differentiation strategy 26

Examples of Focus Strategies LUSH - www. lush. com - Unique makeup/skin-care with a local “warm and fuzzy” approach. Advocates ethical, handmade production. DIAPERS. com – www. diapers. com - Provided quick, convenient way for parents to buy diapers and other baby products. Quidsi, business name for diapers. com, was acquired for $545 million. 27

A Focused Strategy Works Best When: • Costly or difficult for multi-segment rivals to serve specialized needs of target niche • No other rivals are concentrating on same segment • Firm’s resources do not allow it to go after a bigger piece of market • Industry has many different segments, creating more focusing opportunities 28

A Focused Strategy Fails When: Competitors find effective ways to match a focuser’s capabilities in serving niche • Niche buyers’ preferences shift towards product attributes desired by majority of buyers--the niche becomes part of the overall market. • Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered. • 29

Offensive and Defensive Strategies Offensive Strategies Are undertaken to build new or stronger market positions and/or create competitive advantage. Key Insight: The chances for a successful offensive initiative are improved when it is based on a company’s resource strengths and strongest competencies and capabilities. Defensive Strategies Can protect competitive advantage, but rarely are the basis for creating advantage. Key Insight: When to make a move is as important as what move to make. Two defenses – 1) Block avenues challengers can take in mounting offensive attacks, 2 ) Make it clear any challenge will be met with strong counterattack 30

Attacking Competitor Strengths Options: • Offer equally good product at a lower price • Offer a better product at the same price • Leapfrog into next-generation technologies • Add appealing new features • Run comparison ads • Construct new plant capacity • Offer a wider product line • Develop better customer service capabilities 31

Attacking Competitor Weaknesses Basic Approach Concentrate company strengths and resources directly against a rival’s weaknesses Weaknesses to Attack • • • Geographic regions where rival is weak Segments rival is neglecting Go after those customers a rival is least equipped to serve Rivals with weaker marketing skills Introduce new models exploiting gaps in rivals’ product lines 32

Guerrilla Offenses Approach Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favorable to initiator Appeal Well-suited to small challengers with limited resources Options • Focus on narrow target weakly defended by rivals • Challenge rivals where they are overextended and when they are encountering problems • Make random scattered raids on leaders • • • Occasional low-balling on price Intense bursts of promotional activity Legal actions charging antitrust violations, patent infringements, or unfair advertising 33

Preemptive Strikes Approach Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating! Options l l l l Expand capacity ahead of demand in hopes of discouraging rivals from following suit Tie up best or cheapest sources of essential raw materials Move to secure best geographic locations Obtain business of prestigious customers Build an image in buyers’ minds that is unique & hard to copy Secure exclusive or dominant access to best distributors Acquire desirable, but struggling, competitor 34