Business-Level Strategy: Cost Leadership

• Business-level strategy involves integrated and coordinated actions a firm takes to achieve a competitive advantage by leveraging core competencies in specific markets.

Key Questions for Business Strategy

• What can be done to achieve lower overall costs than rivals?
• What can be done to differentiate the firm's product/service to command a premium price?
• Should the focus be on underserved buyer segments or geographic markets?
• Who are the target customer segments?
• What customer needs will the business satisfy?
• Why does the firm want to satisfy those needs?
• How will the firm satisfy customers' needs?

Overall Cost Leadership

• Focuses on producing goods/services with acceptable features at the lowest cost, relative to competitors.
• Attracts price-sensitive customers by maintaining low costs and adequate quality.

Key Activities for Cost Leadership

• Creating a low-cost position relative to competitors.
• Achieving lower costs through production, procurement, or technological efficiencies, such as automating processes or minimizing waste.
• Managing the value chain to lower costs, optimizing every activity from material acquisition to product delivery.
• Exploiting differences in cost behavior to gain a competitive advantage.
• Being the lowest-cost producer means lower prices or higher profit margins, even with moderate sales.
• Walmart lowers costs through supply chain efficiencies and economies of scale to attract price-sensitive customers.

Differentiation

• Focuses on offering unique products or services valued by customers that are willing to pay a premium for quality, brand, design, or unique features.

Key Activities for Differentiation

• Deliver unique and valued products/services.
• Deliver features that differentiate the product from others on the market
• Emphasis will be on non-price attributes which the customers are willing to pay a premium for.

Competitive Advantage through Differentiation

• Charge premium prices for unique offerings.
• Companies can charge premium prices for unique products or services which are valued by customers
• Example: Apple leverages design, user experience, and a unique ecosystem to charge higher prices than competitors like Samsung or Google.

Focus Strategy

• Targets narrow product lines, buyer segments, or geographic areas.
• Focus on a specific product line, a particular buyer segment, or a geographic area
• Selects a specific segment and tailors the strategy to serve it.
• May offer cost leadership or differentiation in a specific market segment to meet unique needs better than competitors.
• Can achieve cost leadership or differentiation in a narrow segment.

Competitive Advantage through Focus Strategy

• Focusing on a specific market or niche.
• Serve the segment more effectively than competitors targeting broader markets.
• Rolls-Royce focuses on luxury cars for high-net-worth individuals.

Cost Leadership Risks

• Overemphasis on one or a few value chain activities can negatively impact other areas.
• Increased costs for inputs can erode the cost advantage.
• Cost leadership strategies are often easy for competitors to replicate.
• Focusing too much on cost may reduce perceived value for customers, leading to lost business.
• Operating at low costs can limit flexibility in responding to changes in consumer preferences.

Differentiation Risks

• Customers may not value the unique features, making efforts ineffective.
• Too many features or changes might make products too complex or costly, reducing customer appeal.
• A price difference between differentiated and standard products may cause customers to be unwilling to pay the premium.
• Competitors might imitate the unique features, eroding the advantage.
• Trying to differentiate in too many ways might confuse the brand's identity.

Focus Risks

• Cost advantages can erode in narrow segments over time as competitors improve.
• New competitors may enter the niche due to low barriers, copying the focused approach.
• Over-focus can lead to missing out on changes in customer needs or broader market trends.
• Niche markets often attract new competitors due to their high profitability.

Cost Leadership: Impact on Five Forces

• Protects against rivalry by maintaining low costs and offering better prices.
• Reduces buyer power by giving customers fewer alternatives at similar price points.
• Reduces supplier power by purchasing in large volumes (economies of scale).
• Creates barriers to entry due to economies of scale and cost advantages.
• Puts the firm in a better position to offer lower prices in response to substitutes.

Differentiation: Impact on Five Forces

• Creates higher entry barriers due to customer loyalty.
• High customer loyalty creates a buffer against competitive rivalry.
• Reduces buyer power because customers have fewer alternatives for unique products.
• Strong brand equity makes it hard for new competitors to enter.
• Customer loyalty reduces the threat of substitutes.

Focus: Impact on Five Forces

• Creates higher entry barriers through market specialization
• Reduces buyer power through tailored products or services and deal with supplier power more effectively through higher margins.
• New entrants might find it harder to target the niche market successfully.
• Niche markets feature fewer substitutes because they are tailored to specific needs.

Combination Strategy: Impact on Five Forces

• Creates higher entry barriers using combined strengths of cost leadership and differentiation allowing the firm to use scale and brand loyalty to manage supplier relationships.
• Reduces threat from substitutes through combined strategies.

Experience Curve

• Refers to the decline in unit costs as cumulative production increases. Firms must stay competitive in differentiation and product characteristics while benefiting from lower costs.

Economies of Scale vs Experience Curve

• Economies of Scale is focused on cost advantages from higher production.
• Experience Curve looks at the relationship between cumulative output and cost per unit, including outside factors like learning effects.

Ways Companies Differentiate

• Brand image or prestige
• Quality
• Innovation
• Product features
• Customer service
• Dealer network

Combination Strategy: Integrated Cost Leadership/Differentiation

• Goal is to provide unique value efficiently, combining low-cost and differentiation strategies, creating a competitive advantage that is difficult to imitate.
• Examples: automated systems, using data analytics for customization, exploiting profit pools, using technology for unscaling

Combination Strategy Risks

• Failing to achieve both strategies while also underestimating challenges in coordinating value-creating activities
• Miscalculating revenue and profit sources.
• May result in being unable to compete effectively in both cost and differentiation

Profit Pools

• Total profits in an industry that vary across different stages of the value chain.

Unscaling

• Strategy where businesses create flexible operations that allow them to combine low cost and differentiation while efficiently meeting the needs of a specific customer group.

The Industry Life Cycle

• Stages - Introduction, Growth, Maturity, Decline

Industry Life Cycle Stages: Key Features

• Introduction: high innovation, low market size, operating losses
• Growth: strong sales, strong brand recognition, attracting competitors
• Maturity: slower demand, market saturation, direct and price competition.
• Decline: Falling sales/profits, changes in consumer preferences, increased price competition.

Strategies for Competitive Advantage in Industry Life Cycle Stages

• Introduction: Develop and produce new products and generate exposure to make the product as standard
• Growth: Create differentiated products, stimulate selective demand, and build strong brand recognition.
• Maturity: Create efficient manufacturing operations; focus on process engineering and cost control.
• Decline: Maintain products hoping competitors exit, harvest profits, exit the market, or consolidate.

Reverse and Breakaway Positioning

• Reverse Positioning: Simplifying the product and offering fewer attributes at a lower price, typically used in the maturity stage.
• Breakaway Positioning: Offering a product that is still in the industry but perceived as significantly different, usually applied in the introduction stage.

Retrenchment Strategy

• Purpose: To stabilize the firm during challenging periods is a strategy that involves reversing performance decline and reinvigorating growth.
• Used: in maturity and decline stages
• Options: asset and cost surgery, selective product and market pruning, piecemeal productivity improvements

Improving Operations

• Asset and Cost Surgery: selling or leasing non-profitable assets and cutting unnecessary costs.
• Selective Product and Market Pruning: stopping unprofitable product lines or markets
• Piecemeal Productivity Improvements: Making small, continuous improvements to increase efficiency and cut costs.

Corporate Strategy

• Corporate strategy is defined as overarching decisions made by senior management to secure competitive advantages across multiple industries and markets
• Deals with what products and services should the firm offer
• Focuses on the level of diversification, vertical integration, geographic scope, and company organization required for success.

Corporate vs Business Strategy

• Corporate Strategy focuses on where the company competes (e.g. industries, markets)
• Business-level Strategy focuses on how a specific business unit competes (e.g. cost leadership, differentiation)

Dimensions of Corporate Strategy

• Vertical Integration: Owning more of the supply chain (from raw materials to direct sales to customers).
• Diversification: Expanding into different industries.
• Geographic Scope: Expanding into new regions or countries.

Key Motivations for Growth

• Increase profitability
• Lower costs
• Increase market power
• Reduce risk
• Motivate management and employees

Transaction Costs

• Transaction costs are defined as the costs incurred during an economic exchange, whether internal or external to the firm.
• Include searching for suppliers/contractors, negotiating, and enforcing contracts

Make-or-Buy Decisions

• Companies should make or buy based on transaction cost economics
• Make when in-house production is cheaper than market prices
• Buy when external sourcing is cheaper and more flexible (access to expertise, lower costs).

Principal-Agent Problem:

• occurs when an agent (e.g., a CEO) acts in their own interest, not in the best interest of the principal (e.g., shareholders)

External Transaction Risks

• Opportunism - self-interest seeking with guile
• Hold-up Problem - withholding cooperation to avoid giving the other party increased bargaining power.
• Information Asymmetry - when one party has more or better information.

Alternatives on the Make-or-Buy Continuum

• Short-Term Contracts, Long-Term Contracts
• Licensing: enabling firms to commercialize intellectual property
• Franchising: granting rights to operate a business under a brand
• Equity Alliances: A partnership in which at least one partner takes partial ownership of the other partner.
• Strategic Alliances - voluntary arrangement between firms that involve the sharing of knowledge, resources, and capabilities
• Joint Ventures: A standalone organization created and jointly owned by two or more parent companies.
• Parent-Subsidiary Relationships are alternative methods for organizing the firm's value chain activities without full vertical integration.

Value Chain and Vertical Integration

• Industry Value Chain: Depiction of the transformation of raw materials into finished goods and services along distinct vertical stages
• Vertical Integration - owning inputs or distribution channels Backward Integration: Moving upstream in the value chain by acquiring or controlling suppliers.
• Forward Integration: Moving downstream in the value chain by controlling distribution or retail (e.g. opening apple stores instead of solely relying on third-party retailers)

Benefits of Vertical Integration

• Reduces cost and eliminates supplier markups while improving quality and ensures consistent qualities
• Facilitates scheduling/planning, synchronizing production and distribution improves efficiency
• Secures critical supplies, and ensures control strengthen market positioning and pricing control.

Alternatives to Vertical Integration

• Taper Integration: A way of orchestrating value activities in which a firm is backwardly integrated while also relies on outside-market firms for some of its supplies
• Mix of internal control with external sourcing for some activities, allowing for flexibility which balances control over the supply chain while maintaining cost-effectiveness.
• Strategic Outsourcing: Moving internal activities to external firms to save costs or improve efficiency while retaining core competencies.

Diversification

• The process of expanding into different products, services, or geographic regions.

Diversification Strategies

• Product Diversification: Increasing the variety of products offered by a firm, active in several product markets.
• Geographic Diversification: Expanding into different countries.
• Mergers & Acquisitions: Combining or purchasing companies.
• Strategic Alliances & Joint Ventures: Partnering with other firms.
• Internal Development: Creating new products or services internally.

Types of Diversification

• Related Diversification: Expanding into industries related to the core business
• Related-Constrained Diversification: New businesses closely related to the core business.
• Related-Linked Diversification: Some businesses share connections, but others do not.
• Unrelated Diversification (Conglomerate Strategy): Expanding into unrelated industries

Levels of Diversification

• Single Business: Over 95% of revenue comes from a single business.
• Dominant Business: 70-95% of revenue from one business, with some diversification.
• Related Diversification: Expands into related industries.
• Unrelated Diversification: A firm derives less than 70% of its revenues from a single dominant business and there are few, if any, linkages among its businesses.

Related Diversification

• Benefit sharing resources and core competencies, achieving cost savings.
• Economies of Scale: Making more of the same type of product lowers costs.
• Leveraging Core Strengths: Companies can use their existing skills and technology.

Unrelated Diversification

• Provides financial stability, flexibility, and access to internal capital markets.
• Flexibility to Invest in Strong Businesses: Companies can move money between businesses depending on which one is performing best.

Core Competence-Market Matrix:

• A framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets. This is used to leverage existing core competencies or build new ones

Diversification Discount

• Occurs when high levels of diversification are associated with lower firm performance.

Restructuring

• The process of reorganizing and divesting business units and activities to refocus a company to leverage its core competencies more fully.

Portfolio Management

• Selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of the firm

BCG Growth-Share Matrix

• The BCG Growth-Share Matrix is a strategic tool used in portfolio management to analyze a company's business units or product lines. It helps firms determine where to allocate resources. The matrix is divided into four quadrants based on market growth rate (high or low) and relative market share (high or low).

BCG Four Quadrants

• Stars (High Market Growth, High Market Share): Require significant investment but have the potential to become future cash cows.
• Cash Cows (Low Market Growth, High Market Share): Mature products with strong market dominance that generate consistent revenue.
• Question Marks (High Market Growth, Low Market Share): Potential stars that require investment to grow.
• Dogs (Low Market Growth, Low Market Share): Units with low growth potential that drain resources.

BCG implication

• Investing in Stars to maintain dominance by investing in a portfolio mix of Question Marks and Cash Cows to become stars.
• Harvesting or Divesting Dogs to cut losses and reallocate resources.
• Using Cash Cows to generate steady profits that can support growth initiatives.