Unit 4 - Business Level Strategies - PDF

MAN4001 – S T R AT E G I C M A N AG E M E N T Competitiveness & Globalization University of Technology - Marie Bradford (2021) 1  Learning Objectives UNIT 4 : 1. Define business-level strategy. BUSINESS LEVEL 2. Dis...

MAN4001 – S T R AT E G I C M A N AG E M E N T Competitiveness & Globalization University of Technology - Marie Bradford (2021) 1  Learning Objectives UNIT 4 : 1. Define business-level strategy. BUSINESS LEVEL 2. Discuss the relationship between customers and S T R AT E G I E S 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. University of Technology - Marie Bradford (2021) 2 Business-level Strategy Business-level strategy is 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 indicates the choices the firm has made about how it intends to compete in individual product markets. Business-level strategy is a deliberate choice about how the firm will perform the value chain activities to create unique value E.g. Southwest’s Competitive Advantages (rivals unable to imitate): Tight integration among activities Cost leadership strategy Unique culture and customer service University of Technology - Marie Bradford (2021) 3 Business-level Strategy o Every firm—ranging from the local dry cleaner to the multinational corporation—must develop and use at least one business-level strategy. o Thus, business-level strategy is the core strategy—the strategy that the firm forms to describe how it intends to compete against rivals on a day-to-day basis in its chosen product market. o Customers are the foundation of successful business-level strategies; firms must continue creating value for their customers if they are to retain them. In terms of customers, when selecting a business-level strategy, the firm determines 1. who will be served, 2. what needs those target customers have that it will satisfy, and 3. how those needs will be satisfied. University of Technology - Marie Bradford (2021) 4  Customers Relationship with Business-Level Strategies Strategic competitiveness results only when the firm satisfies a group of customers by using its competitive advantages as the basis for competing in individual product markets. A key reason firms must satisfy customers with their business-level strategy is that returns earned from relationships with customers are the lifeblood of all organizations. o Effectively Managing Relationships with Customers o Reach, Richness, and Affiliation o Who: Determining the Customers to Serve o What: Determining Which Customer Needs to Satisfy o How: Determining Core Competencies Necessary to Satisfy Customer Needs University of Technology - Marie Bradford (2021) 5 Effectively Managing Relationships with Customers o Firms strengthen their relationships with customers by delivering superior value to them. Strong interactive relationships with customers often provide the foundation for the firm to earn profits because of how well they serve customers’ unique needs. o A number of companies have become skilled at the art of managing all aspects of their relationship with their customers. o For example, competitors and others admire Amazon for the quality of information it maintains about its customers, the services it renders, and its ability to anticipate customers’ needs. Using the information it has, Amazon tries to serve what it believes are the unique needs of each customer. To date, the firm has maintained a strong reputation for being able to do this. University of Technology - Marie Bradford (2021) 6 Reach, Richness, and Affiliation The reach dimension of relationships with customers is concerned with the firm’s access and connection to customers. In general, firms seek to extend their reach, adding customers in the process of doing so. (Facebook, Netflix) Richness, the second dimension of firms’ relationships with customers, is concerned with the depth and detail of the two-way flow of information between the firm and the customer. (Customer centric) Affiliation, the third dimension, is concerned with facilitating useful interactions with customers. Viewing the world through the customer’s eyes and constantly seeking ways to create more value for the customer. University of Technology - Marie Bradford (2021) 7  Reach, Richness, and Affiliation – Example Expanding Horizons is a mid-sized company that sells premium outdoor gear. They are known for high-quality products like tents, backpacks, and hiking boots. Recently, the company decided to refine its business-level strategy to compete with both premium and budget brands. To do this, they are focusing on three strategic elements: Reach, Richness, and Affiliation. 1.Reach - The company wants to expand its market to international customers, especially targeting Europe and Asia, where outdoor adventure tourism is booming. This expansion involves setting up an online store in multiple languages and working with local retailers to stock their products. The goal is to increase the number of customers by providing access to their products globally. 2.Richness - To differentiate from budget competitors, Expanding Horizons decides to offer customized gear packages through their website. Customers can input details about their upcoming trip, and the website will recommend tailored product bundles (like a backpack, tent, and sleeping bag) based on their specific needs (weather, terrain, etc.). This rich experience aims to create value by offering detailed information and tailored recommendations that enhance the customer’s buying experience. 3.Affiliation - Recognizing the importance of community and partnership, Expanding Horizons partners with several influential outdoor bloggers and travel agencies. These affiliates promote the brand through their channels and create a network of trusted voices who recommend the brand. This affiliation increases the company’s visibility and trust within the outdoor adventure community. University of Technology - Marie Bradford (2021) 8 Who, What, & How Deciding who the target customer is that the firm intends to serve with its business-level strategy is an important decision. Companies divide customers into groups based on differences in the customers’ needs – market segmentation. A firm must identify the targeted customer group’s needs (what) that its goods or services can satisfy. Needs (what) are related to a product’s benefits and features. A firm then determines how to use its capabilities and competencies to develop products that can satisfy the needs of its target customers. Firms use core competencies (how) to implement value- creating strategies and thereby satisfy customers’ needs. University of Technology - Marie Bradford (2021) 9  Who, What, & How Who (Target Customers)Expanding Horizons aims to expand its customer base beyond its current market. Initially, the company focused on high-income customers in North America who were avid outdoor adventurers. With its new strategy, the company plans to target a broader range of customers: o Existing customers: High-income individuals who are passionate about outdoor adventure. o New customers: Middle-income customers in both domestic and international markets, especially in Europe and Asia, who enjoy outdoor activities but are looking for premium products at reasonable prices. o Segment-specific customers:Younger adventurers who are interested in eco-friendly gear and sustainability, a growing trend in the market. University of Technology - Marie Bradford (2021) 10  Who, What, & How What (Customer Needs) Expanding Horizons wants to address the following customer needs with its product and service offerings: Premium, high-performance gear: Products that are durable and can withstand extreme weather conditions. Customizable gear options: Personalized recommendations and product bundles for various outdoor conditions, helping customers make informed decisions. Sustainability: An increasing number of customers value eco-friendly products, and Expanding Horizons plans to incorporate sustainable materials and manufacturing processes into their offerings. Convenient online shopping experience: Customers need easy access to the company’s products and quick, reliable delivery options. University of Technology - Marie Bradford (2021) 11  Who, What, & How How (Value Proposition and Competitive Advantage) To meet the needs of both existing and new customers, Expanding Horizons will: Differentiate with customization: By offering personalized gear bundles and detailed product recommendations based on individual customer needs, they will create a more engaging and tailored shopping experience. This customization will enhance customer satisfaction and loyalty. Leverage technology: They will invest in a sophisticated e-commerce platform that allows customers to browse in multiple languages, customize gear, and receive real-time advice and recommendations based on their inputs. Sustainability focus: To attract eco-conscious customers, the company will market its commitment to sustainability through its use of recycled materials and carbon-neutral shipping options. Global partnerships: By collaborating with local retailers in international markets and partnering with influencers and bloggers, Expanding Horizons will enhance their reach and affiliation within the outdoor community. University of Technology - Marie Bradford (2021) 12 The Purpose of a Business-Level Strategy o The purpose of a business-level strategy is to create differences between the firm’s position and those of its competitors. o To position itself differently from competitors, a firm must decide whether it intends to perform activities differently or to perform different activities. o When selecting a business-level strategy, firms evaluate two types of potential competitive advantages: “lower cost than rivals, or the ability to differentiate and command a premium price that exceeds the extra cost of doing so.” o Having lower cost derives from the firm’s ability to perform activities differently than rivals; being able to differentiate indicates the firm’s capacity to perform different (and valuable) activities University of Technology - Marie Bradford (2021) 13 The Purpose of a Business-Level Strategy o For example: o “Southwest’s tightly integrated activities make it difficult for competitors to imitate the firm’s cost leadership strategy. The firm’s unique culture and customer service are sources of competitive advantage that rivals have been unable to imitate, although some tried and failed (e.g., US Airways’ MetroJet subsidiary, United Airlines’ Shuttle by United, Delta’s Song, and Continental Airlines’ Continental Lite). Hindsight shows that these competitors offered low prices to customers, but weren’t able to operate at costs close to those of Southwest or to provide customers with any notable sources of differentiation, such as a unique experience while in the air. The key to Southwest’s success has been its ability to maintain low costs across time while providing customers with acceptable levels of differentiation such as an engaging culture.” University of Technology - Marie Bradford (2021) 14 Business Models and their Relationship with Business-Level Strategies o A business model describes what a firm does to create, deliver, and capture value for its stakeholders. o Understanding customers in terms of who, what, and how is foundational to developing and using successfully both a business model and a business-level strategy. o There is an array of different business models, from which firms select one to use. o A franchise business model, for example, finds a firm licensing its trademark and the processes it follows to create and deliver a product to franchisees. In this instance, the firm franchising its trademark and processes captures value by receiving fees and royalty payments from its franchisees. o A subscription model finds a firm offering a product to customers on a regular basis such as once-per- month, once-per-year, or upon demand. (Netflix) University of Technology - Marie Bradford (2021) 15 Business Models and their Relationship with Business-Level Strategies (1) a freemium model (here the firm provides a basic product to customers for free and earns revenues and profits by selling a premium version of the service—examples include Dropbox and MailChimp); (2) an advertising model (where for a fee, firms provide advertisers with high-quality access to their target customers—Google and Pinterest) (3) a peer-to-peer model (where a business matches those wanting a particular service with those providing that service—two examples are Task Rabbit and Airbnb). ***All these business models support the use of any of the five generic business-level strategies we will discuss. University of Technology - Marie Bradford (2021) 16 Types of Business-Level Strategies University of Technology - Marie Bradford (2021) 17 Cost Leadership Strategy An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Firms using the cost leadership strategy commonly sell standardized goods or services (but with competitive levels of differentiation) to the industry’s most typical customers. Process innovations, which are newly designed production and distribution methods and techniques that allow the firm to operate more efficiently, are critical to successful use of the cost leadership strategy Effective use of the cost leadership strategy allows a firm to earn above-average returns in spite of the presence of strong competitive forces E.g. Wal-Mart is known for its ability to continuously reduce its costs, creating value for customers University of Technology - Marie Bradford (2021) 18 Cost Leadership Strategy o Firms implementing the cost leadership strategy strive constantly to drive their costs lower and lower relative to competitors so they can sell their products to customers at a low and perhaps the lowest cost. o As primary activities, inbound logistics (e.g., materials handling, warehousing, and inventory control) and outbound logistics (e.g., collecting, storing, and distributing products to customers) often account for significant portions of the total cost to produce some products. Research suggests that having a competitive advantage in logistics creates more value with a cost leadership strategy than with a differentiation strategy. o Thus, cost leaders seeking competitively valuable ways to reduce costs may want to concentrate on the primary activities of inbound logistics and outbound logistics. An example of this is the decision by a number of low-cost producers to outsource their manufacturing operations to low-cost firms with low-wage employees (e.g., China). University of Technology - Marie Bradford (2021) 19 Cost Leadership Strategy – Example Expanding Horizons Corporation is facing increased competition from lower-cost outdoor gear brands. To stay competitive while maintaining profitability, they decide to implement a cost leadership strategy. This approach will focus on minimizing costs while still offering quality outdoor products, allowing them to offer competitive prices to a broader market. Lowering Production Costs o Outsourcing production o Streamlining operations o Bulk purchasing of raw materials Economies of Scale o Standardizing product designs o Expanding sales volume Technological Investment for Efficiency o Automating customer service o Inventory management software University of Technology - Marie Bradford (2021) 20 Cost Leadership Strategy – Example By implementing the cost leadership strategy, Expanding Horizons can: o Offer competitive prices while maintaining the quality of their products, appealing to price- sensitive customers. o Maintain profitability by reducing production and operational costs. o Gain market share by targeting both premium and budget-conscious customers, positioning themselves as a value-oriented brand in the outdoor gear industry. University of Technology - Marie Bradford (2021) 21 Cost Leadership Value Chain Activities University of Technology - Marie Bradford (2021) 22 Porter Five Forces & The Cost Leadership Strategy Threat of THREAT OF NEW ENTRANTS new entrants Barriers to potential entrants: Rivalry Bargaining among competing power of – Their need to enter on a large scale in order to suppliers firms be cost competitive Threat of Bargaining – The time it takes to move up the learning curve substitute power of products buyers – Efficiency of cost leaders through continuous efforts to reduce costs enhances profit margins and serves as a significant entry barrier University of Technology - Marie Bradford (2021) 23 Porter Five Forces & The Cost Leadership Strategy BARGAINING POWER OF BUYERS Threat of Can mitigate buyers’ power by: new entrants o Driving prices far below competitors, causing Rivalry Bargaining among power of them to exit, thus shifting power away from buyers competing firms suppliers back to the firm Threat of Bargaining o Powerful customers can force a cost leader to substitute power of reduce its prices, but not below the level where the products buyers next-most-efficient industry competitor can earn average returns University of Technology - Marie Bradford (2021) 24 Porter Five Forces & The Cost Leadership Strategy BARGAINING POWER OF SUPPLIERS Threat of new entrants Rivalry Can mitigate suppliers’ power by: Bargaining among power of competing suppliers o Being able to absorb cost increases due to low cost firms position Threat of Bargaining o Being able to make very large purchases, reducing substitute power of products buyers chance of supplier using power o Outsourcing, to reduce costs may also require relationship-building, particularly to a foreign supplier University of Technology - Marie Bradford (2021) 25 Porter Five Forces & The Cost Leadership Strategy PRODUCT SUBSTITUTES Threat of new entrants Rivalry Bargaining among power of Cost leader is well positioned to: competing suppliers firms o Make investments to be first to create substitutes Threat of Bargaining o Buy patents developed by potential substitutes substitute power of products buyers o Lower prices in order to maintain value position o Be more flexible than its differentiated competitors University of Technology - Marie Bradford (2021) 26 Porter Five Forces & The Cost Leadership Strategy RIVALRY WITH EXISTING COMPETITORS Threat of new entrants Due to cost leader’s advantageous position: Rivalry Bargaining among o Rivals hesitate to compete on basis of price power of competing suppliers firms o Lack of price competition leads to greater profits Threat of Bargaining substitute power of o Rivalry may be based on factors such as size, resources, products buyers location, market dependence, and prior competitive interactions University of Technology - Marie Bradford (2021) 27 Differentiation Strategy The differentiation strategy is 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. While cost leaders serve a typical customer in an industry, differentiators target customers for whom value is created by the manner in which the firm’s products differ from those produced and marketed by competitors. Product innovation is critical to successful use of the differentiation strategy. E.g. High fashion stores such as Gucci and Louis Vuitton University of Technology - Marie Bradford (2021) 28 Differentiation Strategy o Through the differentiation strategy, the firm produces distinctive products for customers who value differentiated features more than low cost. For example, superior product reliability, durability, and high-performance sound systems are among the differentiated features of Toyota Motor Corporation’s Lexus products. o The ability to sell a product at a price that substantially exceeds the cost of creating its differentiated features allows the firm to outperform rivals and earn above average returns. o A firm using the differentiation strategy seeks to be different from its competitors in as many dimensions as possible. o Unusual features, responsive customer service, rapid product innovations, technological leadership, perceived prestige and status, different tastes, and engineering design and performance are examples of approaches to differentiation. University of Technology - Marie Bradford (2021) 29 Differentiation Strategy _ Example Expanding Horizons Corporation wants to stand out in the highly competitive outdoor gear market, which is flooded with both budget and premium brands. To distinguish itself, the company adopts a differentiation strategy by offering unique, high-quality products and services that are difficult for competitors to replicate. Their goal is to attract customers who are willing to pay a premium for these distinctive features. Innovative Product Design Superior Customer Service and Experience o Cutting-edge materials o Adventure support team o Multifunctional products o Lifetime warranty and repairs Customization and Personalization Branding and Community Engagement o Custom-fit gear o Adventure ambassador program o Personalized gear recommendations o Outdoor adventure community University of Technology - Marie Bradford (2021) 30 Differentiation Strategy _ Example By focusing on differentiation, Expanding Horizons can: o Charge premium prices for their unique, high-quality products, appealing to customers who are willing to pay more for exclusive features and superior performance. o Foster customer loyalty through personalization, superior customer service, and community engagement, leading to long-term relationships. o Reduce price sensitivity by offering products and services that are not easily comparable to lower-cost competitors, insulating the company from price wars. University of Technology - Marie Bradford (2021) 31 Differentiation Value Chain Activities University of Technology - Marie Bradford (2021) 32 Porter Five Forces & The Differentiation Strategy THREAT OF POTENTIAL ENTRANTS Threat of Substantial barriers to potential entrants: new entrants o Customer loyalty and the need to overcome the Rivalry among Bargainin uniqueness of a differentiated product g power of competing suppliers firms o New products must surpass proven products Threat of Bargaining o New products must be at least equal to the substitute power of products buyers performance of proven products, but offered at lower prices University of Technology - Marie Bradford (2021) 33 Porter Five Forces & The Differentiation Strategy BARGAINING POWER OF BUYERS Threat of o Can mitigate buyers’ power because well new entrants differentiated products reduce customer Rivalry among Bargainin sensitivity to price increases g power of competing firms suppliers o Customers are willing to accept a price increase when a product satisfies their perceived unique Threat of Bargaining substitute power of needs, as long as they do not think that an products buyers acceptable product alternative exists University of Technology - Marie Bradford (2021) 34 Porter Five Forces & The Differentiation Strategy BARGAINING POWER OF SUPPLIERS Threat of new Can mitigate suppliers’ power by: entrants Rivalry among Bargainin o Absorbing price increases due to higher margins g power of competing from high-quality components suppliers firms Threat of Bargaining o Alternatively, considering buyers’ relative substitute power of buyers insensitivity to price increases and their brand products loyalty, firms may pass along higher supplier prices to the buyer University of Technology - Marie Bradford (2021) 35 Porter Five Forces & The Differentiation Strategy PRODUCT SUBSTITUTES Threat of new entrants Well-positioned relative to substitutes because: Rivalry Bargainin among competing g power of o Brand loyalty to a differentiated product tends to suppliers firms reduce: Threat of Bargaining substitute power of o customers’ testing of new products products buyers o switching brands University of Technology - Marie Bradford (2021) 36 Porter Five Forces & The Differentiation Strategy RIVALRY WITH EXISTING Threat of COMPETITORS new entrants Rivalry Bargainin among g power of o The relationship between brand loyalty and price competing firms suppliers sensitivity insulates a firm from competitive rivalry Threat of Bargaining substitute power of products buyers o Reputation can also sustain the competitive advantage of firms following a differentiation strategy University of Technology - Marie Bradford (2021) 37 Focus Strategies The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. Firms use a focus strategy when they utilize their core competencies to serve the needs of a particular industry segment or niche to the exclusion of others. Examples of specific market segments that can be targeted by a focus strategy include (1) a particular buyer group (e.g., youths or senior citizens), (2) a different segment of a product line (e.g., products for professional painters or the do-it- yourself group), (3) a different geographic market (e.g., northern or southern Italy). University of Technology - Marie Bradford (2021) 38 Focused Strategies o Firms using the focus strategy intend to serve a particular customer segment of an industry more effectively than can industry-wide competitors. o Entrepreneurial firms and certainly entrepreneurial start-ups commonly serve a specific market niche or segment, partly because they do not have the knowledge or resources to serve the broader market. o Firms implementing a focus strategy generally prefer to operate “below the radar” of larger and more resource rich firms that serve the broader market. o Firms can create value for customers in specific and unique market segments by using the focused cost leadership strategy or the focused differentiation strategy. University of Technology - Marie Bradford (2021) 39 Focused Cost Leadership Strategy o A focused cost leadership strategy requires competing based on price to target a narrow market. o In some cases, the target market is defined by demographics. Claire’s, for example, seeks to appeal to young women by selling inexpensive jewelry, accessories, and ear piercings. Claire’s use of a focused cost leadership strategy has been very successful. o IKEA, a global furniture retailer with 403 store locations in 49 markets, uses the focused cost leadership strategy. Demonstrating the low-cost part of the firm’s strategy is its commitment to strive constantly “to reduce costs without compromising quality.” IKEA’s focused cost leadership strategy is the firm’s target market: young buyers desiring style at a low cost. o Although the firm emphasizes low costs, IKEA offers some differentiated features that appeal to or are acceptable to its target customers. Unique furniture designs, in-store playrooms for children, wheelchairs for customer use, and extended hours are examples of the differentiated features IKEA customers like in addition to the low cost of the firm’s products. University of Technology - Marie Bradford (2021) 40 Focused Differentiation Strategy o A focused differentiation strategy requires offering unique features that fulfill the demands of a narrow market. o While a differentiation strategy involves offering unique features that appeal to a variety of customers, the need to satisfy the desires of a narrow market means that the pursuit of uniqueness is often taken to the proverbial “next level” by firms using a focused differentiation strategy. Thus, the unique features provided by firms following a focused differentiation strategy are often specialized. o Some firms using a focused differentiation strategy concentrate their efforts on a particular sales channel, such as selling over the Internet only. Others target particular demographic groups. One example is Breezes Resorts, a company that caters to couples without children. The firm operates seven tropical resorts where vacationers are guaranteed that they will not be annoyed by loud and disruptive children. University of Technology - Marie Bradford (2021) 41 Focused Differentiation Strategy o Some of the new generation of food trucks populating cities such as Los Angeles use the focused differentiation strategy, serving, for example, organic food that often trained chefs and well-known restaurateurs prepare. o Headquartered in Los Angeles and in light of its mission to “heal our planet, one meal at a time,” Green Truck “serves an all organic menu sourced from local organic farms.” To reach as many customers as possible, Green Truck uses Twitter and Facebook to inform customers of its locations as it moves from point to point in Los Angeles. University of Technology - Marie Bradford (2021) 42 Integrated Cost Leadership/Differentiation Strategy Because of these customer expectations, a number of firms engage in primary and support activities that allow them to simultaneously pursue low cost and differentiation. The objective of using this strategy is to efficiently produce products with some differentiated features. Efficient production is the source of maintaining low costs while differentiation is the source of creating unique value. Firms that successfully use the integrated cost leadership/differentiation strategy usually adapt quickly to new technologies and rapid changes in their external environments. E.g. Target Stores – “Expect more, pay less” University of Technology - Marie Bradford (2021) 43 Integrated Cost Leadership/Differentiation Strategy A flexible manufacturing system (FMS) increases the “flexibilities of human, physical, and information resources” that the firm integrates to create relatively differentiated products at relatively low costs. By linking companies with their suppliers, distributors, and customers, information networks provide another source of flexibility. These networks, when used effectively, help the firm satisfy customer expectations in terms of product quality and delivery speed. Total quality management (TQM) is a “managerial innovation that emphasizes an organization’s total commitment to the customer and to continuous improvement of every process through the use of data-driven, problem-solving approaches based on empowerment of employee groups and teams.” Firms develop and use TQM systems in order to (1) increase customer satisfaction, (2) cut costs, and (3) reduce the amount of time required to introduce innovative products to the marketplace. University of Technology - Marie Bradford (2021) 44  Integrated Cost Leadership/Differentiation – Example o Expanding Horizons Corporation is positioned in a competitive outdoor gear market where both cost-conscious consumers and premium buyers exist. The company aims to balance both cost leadership and differentiation strategies, providing affordable products without compromising on quality or unique features. This integrated approach allows the company to appeal to a wider range of customers, from budget-conscious adventurers to those seeking premium, specialized gear. Cost Efficiency without Sacrificing Quality Sustainability as a Value Differentiator and Cost Saver o Efficient manufacturing o Recycled materials o Standardized product lines o Energy-efficient production Differentiated Features for Added Value Efficient yet Premium Customer Service: o Selective innovation o Automated customer support o Hybrid product offerings o Exclusive online communities Balancing Customization with Efficiency Targeting Both Premium and Budget Segments o Mass customization o Scalable personalization o Dual product lines o Flexible pricing model University of Technology - Marie Bradford (2021) 45 Integrated Cost Leadership/Differentiation – Example o By adopting an integrated cost leadership and differentiation strategy, Expanding Horizons can: o Appeal to a wider range of customers: The company attracts both price-sensitive consumers and those willing to pay more for unique, high-quality products. o Maintain profitability: Cost-efficiency measures ensure that the company can keep prices competitive while still making a profit, especially on high-margin, differentiated products. o Stand out in the market: By offering unique, innovative features while keeping costs down, Expanding Horizons builds a competitive edge that is difficult for rivals to imitate. University of Technology - Marie Bradford (2021) 46 Cost Leadership – Risks COMPETITIVE RISKS OBSOLESCENCE: processes used to produce and distribute goods/services may become obsolete due to competitors’ innovations COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation IMITATION: competitors using their own core competencies, may successfully imitate the cost leader’s strategy University of Technology - Marie Bradford (2021) 47 Differentiation – Risks COMPETITIVE RISKS PRICE DIFFERENTIAL: between the differentiator’s and the cost leader’s products becomes too large VALUE DIMINISHED: Differentiation ceases to provide value for which customers are willing to pay EXPERIENCE: narrows customers’ perceptions of the value of differentiated features COUNTERFEIT: goods replicate differentiated features of the firm’s products University of Technology - Marie Bradford (2021) 48 Focused Strategies – Risks COMPETITIVE RISKS OUTFOCUSED: a focusing firm may be “outfocused” by its competitors COMPETITION: a large competitor may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit CHANGING PREFERENCES: customer preferences in the niche market may change to more closely resemble those of the broader market University of Technology - Marie Bradford (2021) 49 Integrated Strategy – Risks “STUCK in the MIDDLE” o Strategy is gaining in popularity… but is RISKY o Products do not offer sufficient value in terms of either low cost or differentiation o Cost structure is not low enough for attractive pricing of products; products not sufficiently differentiated to create value for target customer RESULT: DO NOT EARN ABOVE-AVERAGE RETURNS University of Technology - Marie Bradford (2021) 50  THE END! Next class: Unit 5 – Vertical Integration University of Technology - Marie Bradford (2021) 51