Chapter 5 MGMT481 Business-Level Strategy PDF

CHAPTER 5 Business-Level Strategy: Creating and Sustaining Competitive Advantages Copyright Anatoli Styf/Shutterstock  Learning Objectives Studying this chapter should provide you with the strategic management knowledge needed to: 1. Define bu...

CHAPTER 5 Business-Level Strategy: Creating and Sustaining Competitive Advantages Copyright Anatoli Styf/Shutterstock  Learning Objectives Studying this chapter should provide you with the strategic management knowledge needed to: 1. Define business-level strategy. 2. Discuss the relationship between customers and business-level strategies in terms of who, what, and how. 3. Explain the differences among business-level strategies. 4. Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy. 5. Describe the risks of using each of the business-level strategies. 1–2  Strategic Business Unit (SBU) Multi-Business Corporation SBU 1 SBU 2 SBU 3 - SBU is a homogeneous group of activities that use/share the same technology, the same resources, the same skills, the same facilities,…etc. - SBU is an independent division of a large company, having its own vision, mission and objectives, whose strategy is made separately from other SBUs of the company. - SBU: a distinct part of an organization which focuses upon a particular market or markets for its products and services. Examples:  Alghanim Group: Electronics activity (SBU1), Automobile activity (SBU2), Furniture activity (SBU3)  Virgin Group: Airlines, Money, Hotels, Trains, Mobile, Radio, Wines, etc.  Tata Group: Hotels, Textiles, Steel, Motors, Technologies, Chemicals, Tea, Consultancy, etc. 1–3  Levels of Strategy Video: Levels of Strategy Exhibit: Levels of Strategy https://www.youtube.com/watch?v=iV5dQfljemU Corporate-level strategy Multi-Business company Business-level strategy SBU 1 SBU 2 SBU 3 Functional-level strategy Operation Marketing HR Finance R&D Corporate-level strategy: It is concerned with the strategic decisions that affect the entire organization. Decisions related to what business we should be in, what market we should be serving, how allocating resources, mergers and acquisitions,….are all part of corporate level strategy. Business-level strategy: - How a firm intends to compete in a product market (marketplace). - It addresses the question of how a business competes in a given market space. Functional-level strategy: A strategy adopted by each functional area of the firm such as marketing, Finance, HR, Manufacturing, IT, etc. It needs to be in line with the Business-level strategy and the corporate level strategy to help the firm achieve its overall objectives. 1–4  Levels of Strategy Figure – Components of Organizational Strategy CORPORATE STRATEGY for multibusinesses Where to operate and compete? business strategy/generic startegy/competitive strategy - how sbu can compete in the market 2 tpyes of demand - real/generated demand - shown from previous q, no of people that can stop by and biy yoiur product ORGANIZATIONAL projected demand STRATEGY net demand- no units sold How to balance the ways, ends, and means Financial Strategy HR FUNCTIONAL STRATEGY BUSINESS STRATEGY Strategy How to operate? How to compete? Marketing Strategy Operations IT Strategy Strategy 1–5  Functional-level Strategy Types of functional strategy:  Financial strategy – this may include selecting the main source(s) of funding, the development of the firm’s own funds, and so on.  HR strategy – this includes decisions about how staff are recruited and organized, such as the compensation system, training programs, type of organizational structure, etc.  Marketing strategy – this may include decisions around the pricing of products and services, their promotion and distribution, the image and public relations of the firm, and so on.  Operations strategy – this may include decisions about how the production techniques, use of technology, processes and equipment needed, quality control methods, etc.  IT strategy – this outlines how information technology should be used to help achieve the firm’s goals; it may include an outline of current and future IT projects and initiatives, with timelines and milestones.  …..etc. 1–6  Business-Level Strategy Business-Level Strategy (Competitive 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. Business-level strategy is a means of developing a generic strategy/competitive strategy at the level of the individual business unit (SBU – Strategic Business Unit). Who will be served? Key Issues in What needs will Business-level be satisfied? Strategy How will those needs be satisfied? 1–7  Types of Potential Competitive Advantage There are two ways of competing in the marketplace to achieve competitive advantages (Michael Porter). Low Cost: Achieving lower overall costs than rivals Differentiation: Possessing the capability to differentiate the firm’s product or service and command a premium price 1–8  Competitive Scope Scope: Number of segments a firm chooses to target. Broad Scope – The firm competes in many customer segments. Narrow Scope or niche market – The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others. 1–9 Types of Business-Level Strategies (Michael Porter) 1–10  Cost Leadership Strategy 1. Cost Leadership Strategy (Low cost strategy): An integrated set of actions taken to produce goods or services with features that are acceptable to customers at low cost relative to that of competitors.  Companies using this strategy will typically earn low margins but achieve high sales volumes.  Economies of scale exist in an industry when a firm’s costs fall as a function of its volume of production.  Companies adopting Low-cost Strategy: 1–11 Value-Creating Activities for Cost Leadership 1–12  Differentiation Strategy 2. 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 them.  In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by customers. It selects one or more attributes that many customers in an industry perceive as important, and positions itself to meet those needs.  Saveco: product variety, cleanness, less crowded, international products, good service, etc. (Why do people go shopping at saveco and pay premium prices?) Companies adopting differentiation strategy: Think about: Why do companies like Apple produce in China? 1–13 1–14 Case study: Turkish Airlines 1–15  Focused Strategies 3. Focused Strategies: An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. A focus strategy directs attention (or “focus”) toward narrow product lines, buyer segments, or targeted geographic markets, and they must attain advantages through either differentiation or cost leadership. A focus Strategy consists of offering a product strongly differentiated (in terms of cost or quality) that can attract a narrow segment of customers. Types of focused strategy: 1) Cost focus: a firm seeks a cost advantage in its target segment. (Focused Low-cost Strategy) 2) Differentiation focus: a firm seeks differentiation advantage in its target segment. (Focused differentiation strategy) 1–16  Focused Low-cost Strategy 3.1 - Focused Low-cost Strategy: Focused low-cost strategy: A strategy that is based on the simultaneous reduction of cost and value. Low-cost strategy: A strategy that consists to maintain the level of perceived value but with lower cost. Companies adopting Focus Low-cost strategy: - LIDL (Supermarket) - Many companies offering products for 1KD, 1€, 1$, …. - ….. 1–17  Focused Differentiation Strategy 3.2 - Focused Differentiation Strategy: A focused differentiation strategy requires offering unique features that fulfill the demands of a narrow market. Examples:  Chanel, Giorgio Armani, LV  Creating value for superior design and high quality aware customers.  delivering all aspects of superior design and creativity to its brands.  Ferrari, Rolls-Royce, sports cars, etc.  Very high design, comfort, security,…..  ……. 1–18  Integrated cost leadership/differentiation Strategy 4. Integrated cost leadership/differentiation strategy (Hybrid Strategy) The integrated cost leadership/differentiation strategy involves This strategy combines certain aspects of low cost and certain aspects engaging in primary and support activities that allow a firm to of product differentiation. It utilizes simultaneously pursue an integrated strategy. the strengths of both strategies. The integrated cost leadership/differentiation strategy: It focuses simultaneously on two sources of competitive advantage/Creating customer value. - Low cost : the source of being efficient Think about: - Differentiation : the source of creating high product quality How to lower operating costs without  Example: compromising product or service quality? - Lexus might be a good example of higher perceived value at reasonable prices. It has built a great brand loyalty with this strategy. - Zara, Ikea?  The Hybrid Strategy requires strong commitment and expertise that accompanies firms to follow both strategies (leadership and differentiation) at the same time.  The lowest performing firms were those that did not identify with any type of advantage. They were classified as “Stuck in the middle”: - The cost structure is not low enough to allow it to offer attractive prices and, - The products are not differentiated enough to create value for the target market segment (s). 1–19 1–20  The Strategy Clock The strategy clock: It positions the competitive strategies based on two factors: Price and Perceived value. Hybrid Strategy Differentiation Strategy Focused differentiation : High 4 strategy 3 5 Perceived value Low-cost Strategy 6 2 1 7 Non-competitive Focused low- strategies (6, 7, 8) cost strategy 8 Low Low High Price 1–21 END CHAPTER 5 1–22