Chapter 6: 
Business Level Strategy 

What, who, how to present products to customers. 

Review Questions for Chapter 6:

--   What are the (3) generic business level strategies? 

--   Respond to this statement, “ALL firms strive to lower cost?”

--    Which of the (3) generic business level strategies is a “clean sweep” in terms of Porter’s model, and why?

Business Level Strategy:

--   A company can make choices about its products, markets served, and distinctive competencies at the business level that will...

•  Maximize strengths

•  Capitalize on opportunity

•  Minimize weaknesses

•  Avoid threats

Porter’s Business Level Strategies:

I.      Product Differentiation

II.   Cost leadership

III.  Focus Differentiator

IV.  Focus Cost Leader

All of these build from:

--           Meeting needs

--           Selecting a group of customers,

--           Choosing distinctive competencies...

Defining the business.

I.  Product Differentiation

--   ... process of creating a competitive advantage by designing product characteristics to satisfy customer needs.

--   Product differentiation does NOT focus on LOW price. Goal is to charge greater $ due to some unique product feature.

Differentiation may be
based on:

--        Physical characteristics of product,

--           Appeals to psychological needs,

--           Number of models in product range,

--           Development of distinctive

         competence.

Differentiation Strategy entails:

--    High product differentiation.

            (The defining characteristic.)

--   Seeks to serve  MANY different sets of needs.

--   R & D Distinctive competence.

II.  Cost Leadership

--   Goal is to outperform competitors by producing goods and services at a lower cost.

Two possible advantages:

--   1.     When all companies in the industry

         charge same price, cost leaders make    

         greater profits.

--   2.     If price wars develop and

         competition increases, high-cost

         companies will be driven out. 

Cost Leadership Strategy entails:

--   Low product differentiation.

--   Seeks to serve  AVERAGE needs.

--   Manufacturing Distinctive competence.

All companies want to reduce cost.  Right?

--   Understand.... the cost leader takes this to an extreme.  They consider cost in everything they do. 

Dangers of Cost Leadership:

--   One-up-man-ship.  Competitors can always come up with a better mousetrap.

--   Competitors can imitate your methods of cost reduction.

--   Lose sight of customers' needs, result would be lower profits, low competitive advantage.

III.  and IV.  Focus Strategy.

--   Directed at serving the needs of a limited customer group or set.  A focus strategy centers on specialization.

Concentrates on serving a particular market niche that may be defined as:

--   a.        Geographic

--   b.        Customer type, e.g. very young,

          very rich

--   c.        Segment or type of product line, e.g.

         only very expensive autos or

         designer clothes.

Focus Strategy entails:

--   Low or High product differentiation.

--   ANY kind of Distinctive competence may serve useful here.

--    Look at Table 6.1

Cost Leadership and Porter's model:

a.        Competitive rivalry:                          

     Cost leaders are protected against rivals by their cost advantage.

b. Bargaining power of suppliers: 

     Lower costs will mean that these companies will be less effected than will their competitors. 

•  Cost Leaders focus LESS on quality than on price of supplies, so ... can shift from one low cost supplier to the next.

c.  Bargaining power of customers:       

     Cost leader is less affected by buyers' ability to squeeze down prices. They may ALREADY offer the lowest prices.

d. Entry barriers:                                

     Cost advantage is barrier to entry, other companies can't enter at lower cost.

e.  Substitute Products:                      

     The cost leader is better able than their competition to combat substitute products...

     As cost leaders they often offer the best price deal there is!

Remember cost leadership dangers?

--   One-up-man-ship. 

     Competitors can always come up with a better mousetrap.

--    Competitors can at least imitate your methods of cost reduction.

--    Can lose sight of customers' needs, and become very single-minded about cost reduction. 

--    Result would be lower profits and poorer competitive advantage.

Product Differentiation and
Porter's Model:

a.        Competitive rivalry:                          

     Potential competitors are not a threat IF the company has brand loyalty.

b. Bargaining power of suppliers: 

     Rarely a problem because the company's strategy is geared toward the price it can charge rather than toward minimizing costs.

--    Don't forget... the goal of a differentiation strategy is to make your product unique ENOUGH to be able to charge a higher price for it.

c.  Bargaining power of customers:       

     Powerful buyers are almost antithetical to the strategy itself... It wouldn't make sense for consumers to bargain on basis of price. 

     They are loyal to the company due to the fact that they offer such a unique product or service.... price is much LESS an issue to them. 

d. Entry barriers:            

     Costly to enter due to cost of developing new products that match the differentiator's.

 --    Thus, barriers are HIGH.

e.  Substitute Products:                      

     Threats depend on ability of competitors to develop products that can meet same customer needs as the differentiator's.

     Also has to do with brand loyalty... if the differentiator has high brand loyalty, substitute providers have less chance to push you out of the way.

Focus Strategy and Porter's Model:

a.        Competitive rivalry:      

     Focus strategists are protected to extent that they can provide a product or service at a price or quality others can't provide.

b. Bargaining power of suppliers: 

     THREAT.  Company buys in small volumes, and has little bargaining power. 

      NOTE:  If company can pass price increases on, this is less of a problem.

c.  Bargaining power of buyers:     

     Ability to satisfy unique customer needs gives company power over its buyers; they can't get same thing from other companies.

d. Entry barriers:    

     Focus strategists are protected here because competitors have to overcome brand loyalty of customers.

e.  Substitute products:  

     These must overcome brand loyalty that is enjoyed by focus strategists.

Question:

What is the Focus strategist counting on?

Answer:

--   BRAND LOYALTY

--   This comes from specializing in such a way that consumers’ needs are closely met.

Stuck in the Middle
(.... with no where to go?)

--   Condition that exists when companies do a poor job of achieving a fit between products and markets to be served.

--   Example:        A cost leader choosing a high level of market segmentation... 

--   Question:  Why won't this work?

--   ANSWER:

--   Cost leader's costs will ESCALATE.

--   They MAINTAIN leadership by meeting AVERAGE customers' needs.

--   Example:        A focus strategy fails because the company starts to broaden its product focus...  in other words, the narrow focus that lead to the company's success is broadened.

When specialization is sought, failure can occur due to loss of brand loyalty.

--   Example:        A differentiator strategy can fail if competitors enter market and chip away at competitive advantage. 

--   Why would this happen?  Perhaps product uniqueness is imitated by a competitor, who "steals" ideas and hops over the ever lowering entry barriers.

We can make SOME generalizations about stage of industry evolution and appropriate business level strategy. 

e.g., embryonic, growth stages

--   Selection of generic business strategy must fit industry's stage of the life cycle.

 Life Cycle Stage        Generic Strategy 

Life Cycle Stage        Generic Strategy

--   Work on getting products to customers.

--   Can sell all you produce. 

--   Will materials management system will permit this?

Life Cycle Stage        Generic Strategy

--   Many get stuck in the middle here and exit the industry.

Life Cycle Stage        Generic Strategy

--   Mobility barriers between groups due to the investment in strategic approaches taken. 

--   Once one generic strategy is chosen, its very difficult to change to another... the investment is substantial by this point.

    Generic strategies are expensive!