business strategy 2-12-07

business strategy 2-12-07 - Core Competency Strategy...

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Unformatted text preview: Core Competency Strategy Business Level Strategy The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Generic Business Level Strategies Source of Competitive Advantage Business Level Strategy • Business Level Strategy is concerned with a firm’s position in an industry, relative to competitors & the five forces • Strategies allow organizations to gain competitive advantage from different generic strategies Cost Leadership Business Level Strategy Cost Broad Target Market Cost Leadership Differentiation • Relatively standardized products Focused Low Cost Focused Differentiation • Lowest competitive price Narrow Target Market Breadth of Competitive Scope Uniqueness Cost Leadership Key Criteria • Features acceptable to many customers How to Obtain a Cost Advantage Business Level Strategy Requirements • Constant effort to reduce costs through: • Building efficient scale facilities • Tight control of production costs and overhead • Minimizing costs of sales, R&D and service • “State of the Art” manufacturing facilities • Monitoring costs of activities provided by outsiders • Simplification of processes • Determine and Control Cost Drivers • Reconfigure the organization as needed Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales New raw material Forward integration Backward integration Change location relative to suppliers or buyers 1 Choices that Drive Costs Economies of scale Product features Asset utilization Performance Capacity utilization pattern - Seasonal, cyclical Interrelationships - Order processing and distribution Value chain linkages Mix & variety of products Service levels Three Key Questions • How can an activity be performed differently or even eliminated? • How can a group of linked value activities be regrouped or reordered? Small vs. large buyers Process technology Wage levels - Advertising & Sales Product features - Logistics & Operations • How might coalitions with other firms lower or eliminate costs? Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors Hiring, training, motivation Cost Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Wal-Mart Differentiation Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can frighten off New Entrants due to the need to: * Enter at large scale to be Cost Competitive * Take time to move down the “Learning Curve” Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can frighten off New Entrants due to the need to: * Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” Can mitigate Buyer Power by: * Driving prices far below competitors may cause exit and shift power back to firm Bargaining Power of Buyers 2 Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can frighten off New Entrants due to the need to: * Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” Threat of New Entrants Threat of Substitute Products Well positioned relative to Substitutes in order to: * Make investments to create Bargaining Power of Buyers substitutes first * Buy patents developed by potential substitutes Can mitigate Buyer Power by: Driving prices far below competitors which may cause exit and shift power back to firm * Lower prices to maintain Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Can frighten off New Entrants due to the need to: * Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” Can mitigate Supplier Power by: * Low cost position makes them better able to absorb cost increases Bargaining Power of Buyers * More likely to make very large purchases which reduces chance of supplier power value position Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry Can mitigate Supplier Power by: * Low cost position makes them better able to absorb cost increases * More likely to make very large purchases which reduces chance of supplier power Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Suppliers Well positioned relative to Substitutes in order to: Bargaining Power of Buyers Can mitigate Buyer Power by: * Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position Driving prices far below competitors which may cause exit and shift power back to firm Threat of Substitute Products Value Creating Activities common to a Cost Leadership Business Level Strategy Cost Business A Technological Development IN IN Service R G A M Marketing & Sales Outbound Logistics Inbound Logistics • Dramatic technological change could take away your cost advantage • Competitors may learn how to imitate Value Chain • Focus on efficiency could cause Cost Leader to overlook changes in customer preferences Key Criteria R G Procurement Operations Support Activities M The Major Risks involved with a Cost Leadership Business Level Strategy -- Differentiation Business Level Strategy Firm Infrastructure Human Resource Management Cost Leadership Business Level Strategy • Value provided by unique features and value characteristics • Command premium price • High customer service • Superior quality • Prestige or exclusivity • Rapid innovation Primary Activities 3 Differentiation Differentiation Business Level Strategy Business Level Strategy Effectiveness with Differentiation grows out of Differentiation Value Chain activities Value Examples: Requirements Heineken beer Raw materials Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship Intel microprocessors Technological superiority Caterpillar tractors Service buyers’ needs quickly anywhere in the world Constant effort to differentiate products through: • Developing new systems and processes • Shaping perceptions through advertising • Quality focus • Capability in R&D • Maximize Human Resource contributions through low turnover and high motivation Differentiation Drivers of Differentiation Business Level Strategy Some Examples: Create Value with Differentiation by: • Unique product features • Lowering Buyers’ Costs • Unique product performance • Raising Buyers’ Performance Sustainability is created through: • Exceptional services • Creating barriers by perceptions of uniqueness • Creating switching costs through differentiation • New technologies • Quality of inputs • Exceptional skill or experience • Detailed information Cost Neiman Marcus Effective Differentiators can remain profitable even when the Five Forces appear unattractive Differentiation 4 Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can fend off New Entrants because: Can fend off New Entrants because: * New products must surpass proven products * Or be equal to performance at lower prices * New products must surpass proven products * Or be equal to performance at lower prices Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of Threat New Entrants Bargaining Power of Suppliers * New products must surpass proven products * Or be equal to performance at lower prices * Absorbing price increases due to higher margins * Passing on higher supplier prices because buyers are brand loyal Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of Threat New Entrants * Absorbing price increases due to higher margins * Passing on higher supplier prices because buyers are brand loyal Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Brand loyalty Brand overcomes much price competition Bargaining Power of Buyers Bargaining Power of Buyers Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can fend off New Entrants because: Can mitigate Supplier Power by: Can Can mitigate Supplier Power by: Can mitigate Buyer Power because: Well differentiated products reduce customer sensitivity to price increases Threat of Substitute Products Threat of New Entrants Can fend off New Entrants because: * New products must surpass proven products * Or be equal to performance at lower prices Well positioned relative to Substitutes because: * Brand loyalty tends to reduce new product trial and brand switching Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Differentiation Business Level Strategy The Major Risks involved with a Differentiation Business Level Strategy: • Customers may decide that the cost of “uniqueness” is too great • Competitors may learn how to imitate Value Chain Well positioned relative to Substitutes because: * Brand loyalty tends to reduce new product trial and brand switching Threat of Substitute Products Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases • The means of uniqueness may no longer be valued by customers 5 Generic Business Level Strategies Focused Business Level Strategies Source of Competitive Advantage Cost Uniqueness Broad Target Market Cost Leadership Differentiation Narrow Target Market Focused Low Cost Focused Differentiation Focused Business Level Strategies involve the same basic approach as Broad Market Strategies However…. Opportunities may exist because: Breadth of Competitive Scope • Large firms may overlook small niches • Firms many lack resources to compete industry-wide • May be able to serve a narrow market segment more effectively than industry-wide competitors • Focus can allow you to direct resources to certain value chain activities to build competitive advantage • May be able to retrofit old factories to keep costs down • Minimize R&D costs by copying innovators Focused Focused Business Level Strategies Business Level Strategies - Bang & Olufsen Upscale electronic components - Snap-on tools High quality mechanics’ tools - Iams Company Focused Business Level Strategies involve the same basic approach as Broad Market Strategies Premium pet foods Focused Differentiators may thrive by selecting a small market that is underserved by large players Custom manufacturers of parts for Harley-Davidson Focused Differentiation motorcycles Generic Business Level Strategies Source of Competitive Advantage Business Level Strategy • Involve the same basic approach as Broad Market Strategies Cost Uniqueness • May thrive by selecting a small market that is underserved by large players • Major risks involved with a Focused Differentiation Business Level Strategy • Firm may be “outfocused” by competitors • Large competitor may set its sights on your niche market • Preferences of niche market may change to match those of broad market Breadth of Competitive Scope Broad Target Market Integrated Low Cost/ Differentiation Narrow Target Market 6 Integrated Low Cost/Differentiation Strategy Integrated Low Cost/Differentiation Strategy Firms using an Integrated Strategy may: Adapt more quickly Learn new skills and technologies May utilize Flexible Manufacturing Systems to create differentiated products at low costs Leverage core competencies through Information Networks across multiple business units May utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs Integrated Low Cost/Differentiation Strategy Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise Compromise The risk is that the firm may become “Stuck in the Middle” lacking a strong commitment to or expertise with either type of generic strategy Specialized Strategies Southwest Airlines Low Cost Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes No meals 15 minute turnaround time No reserved seats No travel agent reservations Differentiation Focus on customer satisfaction High level of employee dedication New flight services for business travelers (Phones and faxes) • Specialized Strategies • Entry • competitively favorable short-term benefits • Exit • withdraw from an industry • Turnaround • Revitalize businesses in a slump 7 ...
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This note was uploaded on 04/04/2012 for the course BUSINESS 181 taught by Professor Dara during the Spring '07 term at uot.

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