COMM 4351 Business-Level Strategy Chapter 5 Business-level ...
COMM 4351
Business-Level Strategy
Chapter 5
Business-level strategy: the business’s overall competitive theme, the way its positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings -
Who a company decides to serve (segments)
-
What customer needs and desires the company is trying to satisfy
-
How the company decides to satisfy those needs and desires
-
Basically how companies construct a mission statement LOW COST AND DIFFERENTIATION
Lowering Costs -
In commodity markets, competitive advantage goes to the company that has the lowest cost
-
Also works in other industries
-
ex. Wal-Mart (General merchandise industry) because its costs are so low, it can cut prices, grow its market share, and still make profits at price points where it competitors are losing money
-
ex. Southwest Airlines has a low-cost position
-
Differentiation o
Offering something that rivals find hard to match
1. Allows the company to charge a premium price 2. Helps the company grow overall demand for its good or service
-
o
Often raises the cost-structure of a firm (ex. Nordstrom has lower turnover, therefore higher turnover costs than Walmart)
o
Successful differentiation gives managers options (ex. Apple)
o
Unique offering can drive business, allow for economies of scale, and also allow for growth/expansion opportunities
Differentiation-Low Cost tradeoff o
Subtle relationship
o
“efficiency frontier”
1
COMM 4351
-
Business-Level Strategy
Chapter 5
o
There are often multiple positions on the differentiation-low cost continuum that are viable in the sense that they have enough demand to support an offering
o
To successfully implement a business-level strategy and get to the efficiency frontier, a company must be pursuing the right functional-level strategies, and it must be appropriately organized, and in-sync with the business-level strategy
Value Innovation: greater differentiation at a lower cost o
The efficiency frontier is constantly being pushed outwards
o
Value innovation: when innovations push out the efficiency frontier in an industry, allowing for greater value to be offered through superior differentiation at a lower cost than was previously possible
o
Ex. Toyota redefined what was possible in the automobile industry by using lean production systems that improved quality while lowering costs. This pushed out the frontier WHO ARE OUR CUSTOMERS? MARKET SEGMENTATION
-
Business-level strategy begins with the customer
Market segmentation: the way a company decide to group customers based on important differences in their needs to gain a competitive advantage o -
Customers in these segments are generally homogenous, but differ from other segments of the market
Approaches to market segmentation: 1. Choose not to sell to different segments, produce a standardized product targeted towards the average consumer
(ex. Coke before they invented Diet Coke) 2
COMM 4351
Business-Level Strategy
Chapter 5
2. Create different product offerings for different segments
(Coke Zero, Diet Coke)
3. Only target a limited number of segments/just one segment and become the very best at serving that particular segment
(ex. Porsche serves only the very top end of the market)
Standardization strategy: when a company decides to ignore different segments, and produce a standardized product for the average consumer Segmentation strategy: when a company decides to serve many segments, or even the entire market, producing different offerings for different segments Focus strategy: when a company decides to serve a limited number of segments, or just one segment -
Market Segmentation, Costs, and Revenues o
Standardization strategy is typically associated with lower costs than segmentation, it tries to achieve economies of scale
o
Segmentation requires more customizability, which often drives up costs, but can drive higher sales overall by catering to more people
o
Higher cost structure due to adding specific elements for their one segment/few segments, offers less variety BUSINESS-LEVEL STRATEGY CHOICES
Generic business-level strategy: a strategy that gives a company a specific form or competitive position and advantage vis-à-vis its rivals that results in above-average profitability 1. Broad low-cost strategy: when a company lowers costs so that it can lower prices and still make a profit 2. Broad differentiation strategy: when a company differentiates its product in some way, such as recognizing different segments or offering different products to each segment 3. Focus low-cost strategy: when a company targets a certain segment or niche, and tries to be the low-cost player in that niche 4. Focus-differentiation strategy: when a company targets a certain segment or niche, and customizes its offering to the needs of that particular segment through the addition of features and products
3
COMM 4351
Business-Level Strategy
Chapter 5
-
Porter argues that you must choose between the different strategies to avoid being stuck in the middle
-
Still, don’t ignore the benefits or movements in the other strategies (ex. Just because you’re low-cost doesn’t mean you can ignore differentiation) BUSINESS-LEVEL STRATEGY, INDUSTRY AND COMPETITIVE ADVANTAGE
-
A well-chosen and well-crafted business strategy can put the company in an advantageous position relative to the forces, particularly the threat of entrants, power of buyers and suppliers, threat of substitutes, and intensity of rivalry
-
Low-cost offerings are hard to match barrier to entry, also protects against substitutes
-
Differentiated company brand loyalty is a barrier to entry, niche focused can outsell differentiated rivals that target a broader market (ex. Porsche can outsell Toyota in the high-end sports car market)
IMPLEMENTING BUSINESS-LEVEL STRATEGY -
There must be alignment or fit between business-level strategy, functional strategy, and organizational arrangements
-
Lowering costs through functional strategy and organization o
Pursue functional-level strategies that result in superior efficiency and superiority product reliability
o
Important factors for low-cost:
Economies of scale 4
COMM 4351
o
-
Business-Level Strategy
Lean production, flexible manufacturing
Streamlined processes
Use info systems to automate business processes
Increase customer retention and reduce customer churn
Chapter 5
Reward employee behaviours that are consistent with or lead to higher productivity
Differentiation through functional strategy and organization o
Emphasis on innovation
o
Achieve superior quality in terms of both reliability and excellence
o
Specific functional strategies include:
Customization to target different segments
Design products with highly perceived quality
Well-developed customer care
Marketing – brand building and perceived differentiation
Hiring and employee development
COMPETING DIFFERENTLY: SEARCHING FOR A BLUE OCEAN -
Value innovation: Companies can sometimes shift the game in their industry by figuring out ways to offer more value through differentiation at a lower cost than its rivals (ex. Toyota)
-
Creating a new market space
-
o
Ex. Southwest airlines in low-cost market, considered competition not necessarily other airlines, but people who typically drove or took the bus to travel (much cheaper than flying)
o
Flew through smaller city airports
o
Many flights per day to make flying times convenient
Thinking about how a company might redefine its market and craft a new business-level strategy: o
Eliminate – to reduce costs
o
Reduce – to below industry standard, to lower cost
o
Raise – to above industry standard, to increase value 5
COMM 4351
Business-Level Strategy
o
Create – that rivals don’t offer, to increase value
o
Ex. Southwest:
Chapter 5
Eliminated lounges, business seating, and meals
Reduced in-flight refreshment to way below industry standards
Raised speed by flying point to point
Created more value by flying into smaller airports whenever possible
6
Business-Level Strategy
Chapter 5
Business-level strategy: the business’s overall competitive theme, the way its positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings -
Who a company decides to serve (segments)
-
What customer needs and desires the company is trying to satisfy
-
How the company decides to satisfy those needs and desires
-
Basically how companies construct a mission statement LOW COST AND DIFFERENTIATION
Lowering Costs -
In commodity markets, competitive advantage goes to the company that has the lowest cost
-
Also works in other industries
-
ex. Wal-Mart (General merchandise industry) because its costs are so low, it can cut prices, grow its market share, and still make profits at price points where it competitors are losing money
-
ex. Southwest Airlines has a low-cost position
-
Differentiation o
Offering something that rivals find hard to match
1. Allows the company to charge a premium price 2. Helps the company grow overall demand for its good or service
-
o
Often raises the cost-structure of a firm (ex. Nordstrom has lower turnover, therefore higher turnover costs than Walmart)
o
Successful differentiation gives managers options (ex. Apple)
o
Unique offering can drive business, allow for economies of scale, and also allow for growth/expansion opportunities
Differentiation-Low Cost tradeoff o
Subtle relationship
o
“efficiency frontier”
1
COMM 4351
-
Business-Level Strategy
Chapter 5
o
There are often multiple positions on the differentiation-low cost continuum that are viable in the sense that they have enough demand to support an offering
o
To successfully implement a business-level strategy and get to the efficiency frontier, a company must be pursuing the right functional-level strategies, and it must be appropriately organized, and in-sync with the business-level strategy
Value Innovation: greater differentiation at a lower cost o
The efficiency frontier is constantly being pushed outwards
o
Value innovation: when innovations push out the efficiency frontier in an industry, allowing for greater value to be offered through superior differentiation at a lower cost than was previously possible
o
Ex. Toyota redefined what was possible in the automobile industry by using lean production systems that improved quality while lowering costs. This pushed out the frontier WHO ARE OUR CUSTOMERS? MARKET SEGMENTATION
-
Business-level strategy begins with the customer
Market segmentation: the way a company decide to group customers based on important differences in their needs to gain a competitive advantage o -
Customers in these segments are generally homogenous, but differ from other segments of the market
Approaches to market segmentation: 1. Choose not to sell to different segments, produce a standardized product targeted towards the average consumer
(ex. Coke before they invented Diet Coke) 2
COMM 4351
Business-Level Strategy
Chapter 5
2. Create different product offerings for different segments
(Coke Zero, Diet Coke)
3. Only target a limited number of segments/just one segment and become the very best at serving that particular segment
(ex. Porsche serves only the very top end of the market)
Standardization strategy: when a company decides to ignore different segments, and produce a standardized product for the average consumer Segmentation strategy: when a company decides to serve many segments, or even the entire market, producing different offerings for different segments Focus strategy: when a company decides to serve a limited number of segments, or just one segment -
Market Segmentation, Costs, and Revenues o
Standardization strategy is typically associated with lower costs than segmentation, it tries to achieve economies of scale
o
Segmentation requires more customizability, which often drives up costs, but can drive higher sales overall by catering to more people
o
Higher cost structure due to adding specific elements for their one segment/few segments, offers less variety BUSINESS-LEVEL STRATEGY CHOICES
Generic business-level strategy: a strategy that gives a company a specific form or competitive position and advantage vis-à-vis its rivals that results in above-average profitability 1. Broad low-cost strategy: when a company lowers costs so that it can lower prices and still make a profit 2. Broad differentiation strategy: when a company differentiates its product in some way, such as recognizing different segments or offering different products to each segment 3. Focus low-cost strategy: when a company targets a certain segment or niche, and tries to be the low-cost player in that niche 4. Focus-differentiation strategy: when a company targets a certain segment or niche, and customizes its offering to the needs of that particular segment through the addition of features and products
3
COMM 4351
Business-Level Strategy
Chapter 5
-
Porter argues that you must choose between the different strategies to avoid being stuck in the middle
-
Still, don’t ignore the benefits or movements in the other strategies (ex. Just because you’re low-cost doesn’t mean you can ignore differentiation) BUSINESS-LEVEL STRATEGY, INDUSTRY AND COMPETITIVE ADVANTAGE
-
A well-chosen and well-crafted business strategy can put the company in an advantageous position relative to the forces, particularly the threat of entrants, power of buyers and suppliers, threat of substitutes, and intensity of rivalry
-
Low-cost offerings are hard to match barrier to entry, also protects against substitutes
-
Differentiated company brand loyalty is a barrier to entry, niche focused can outsell differentiated rivals that target a broader market (ex. Porsche can outsell Toyota in the high-end sports car market)
IMPLEMENTING BUSINESS-LEVEL STRATEGY -
There must be alignment or fit between business-level strategy, functional strategy, and organizational arrangements
-
Lowering costs through functional strategy and organization o
Pursue functional-level strategies that result in superior efficiency and superiority product reliability
o
Important factors for low-cost:
Economies of scale 4
COMM 4351
o
-
Business-Level Strategy
Lean production, flexible manufacturing
Streamlined processes
Use info systems to automate business processes
Increase customer retention and reduce customer churn
Chapter 5
Reward employee behaviours that are consistent with or lead to higher productivity
Differentiation through functional strategy and organization o
Emphasis on innovation
o
Achieve superior quality in terms of both reliability and excellence
o
Specific functional strategies include:
Customization to target different segments
Design products with highly perceived quality
Well-developed customer care
Marketing – brand building and perceived differentiation
Hiring and employee development
COMPETING DIFFERENTLY: SEARCHING FOR A BLUE OCEAN -
Value innovation: Companies can sometimes shift the game in their industry by figuring out ways to offer more value through differentiation at a lower cost than its rivals (ex. Toyota)
-
Creating a new market space
-
o
Ex. Southwest airlines in low-cost market, considered competition not necessarily other airlines, but people who typically drove or took the bus to travel (much cheaper than flying)
o
Flew through smaller city airports
o
Many flights per day to make flying times convenient
Thinking about how a company might redefine its market and craft a new business-level strategy: o
Eliminate – to reduce costs
o
Reduce – to below industry standard, to lower cost
o
Raise – to above industry standard, to increase value 5
COMM 4351
Business-Level Strategy
o
Create – that rivals don’t offer, to increase value
o
Ex. Southwest:
Chapter 5
Eliminated lounges, business seating, and meals
Reduced in-flight refreshment to way below industry standards
Raised speed by flying point to point
Created more value by flying into smaller airports whenever possible
6
