Chapter 4 Strategic Management and Strategic Competitiveness

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Chapter 4

Business-Level Strategy

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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

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Customers: Business-Level Strategic Issues Customers are the foundation of successful business-level strategyWho will be served by the strategy? What needs those target customers have that the strategy will satisfy? How those needs will be satisfied by the strategy?

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Customers: Who, What, How Firms must manage all aspects of their relationship with customersReach: firm’s success and connection to customers Richness: depth and detail of two-way flow of information between the firm and the customer Affiliation: facilitation of useful interactions with customers

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Customer Needs—Who?Determining the Customers to Serve

Consumer Markets

Customers

Industrial Markets

Market Segmentation

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Basis for Customer SegmentationConsumer Markets1. Demographic factors (age, income, sex, etc.) 2. Socioeconomic factors (social class, stage in the family life cycle) 3. Geographic factors (cultural, regional, and national differences) 4. Psychological factors (lifestyle, personality traits) 5. Consumption patterns (heavy, moderate, and light users) 6. Perceptual factors (benefit segmentation, perceptual mapping)

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Basis for Customer Segmentation (cont’d)Industrial Markets1. End-use segments (identified by SIC code) 2. Product segments (based on technological differences or production economics) 3. Geographic segments (defined by boundaries between countries or by regional differences within them) 4. Common buying factor segments (cut across product market and geographic segments) 5. Customer size segments

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Customer Needs—What? Customer Needs to SatisfyCustomer needs are related to a product’s benefits and features Customer needs are neither right nor wrong, good nor bad Customer needs represent desires in terms of features and performance capabilities

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Customer Needs—How? Business-Level StrategiesTo create differences between the firm’s position relative to those of its rivals

To position itself, the firm must decide whether it intends to:Perform activities differently or Perform different activities as compared to its rivals

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Five BusinessLevel Strategies

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Cost Leadership Strategy

Relatively standardized products Features acceptable to many customers Lowest competitive price

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Cost Leadership Strategy Cost saving actions required by this strategy:Building efficient scale facilities Tightly controlling production costs and overhead Minimizing costs of sales, R&D and service Building efficient manufacturing facilities Monitoring costs of activities provided by outsiders Simplifying production processes

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Cost Leadership Strategy: 5 Forces analysis The Threat of Potential Entrants Can frighten off new entrants due to:Their need to enter on a large scale in order to be cost comp

etitive The time it takes to move down the learning curve

Bargaining Power of Suppliers Can mitigate suppliers’ power by:Being able to absorb cost increases due to low cost position Being able to make very large purchases, reducing chance of supplier using power

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Cost Leadership Strategy: 5 Forces analysis Bargaining Power of Buyers Can mitigate buyers’ power by:Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm

Product Substitutes Cost leader is well positioned to:Make investments to be first to create substitutes Buy patents developed by potential substitutes Lower prices in order to maintain value position

Rivalry with Existing Competitors Due to cost leader’s advantageous position:Rivals hesitate to compete on basis of price Lack of price competition leads to greater profits

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Cost Leadership Strategy (cont’d) Competitive RisksProcesses used to produce and distribute good or service may become obsolete due to competitors’ innovations Focus on cost reductions may occur at expense of customers’ perceptions of differentiation Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

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Differentiation Strategy An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to themNonstandardized products Customers value differentiated features more than they value low cost