Chapter 4 Business-Level Strategy

Chapter 4Business-Level StrategyMichael A. HittR. Duane IrelandRobert E. Hoskisson©2000 South-Western College PublishingChapter 3InternalEnvironmentChapter 2ExternalEnvironmentThe StrategicManagementProcessStrategic IntentStrategic MissionStrategicCompetitivenessAbove AverageReturnsFeedbackStrategy FormulationChapter 4Business-LevelStrategyChapter 5CompetitiveDynamicsChapter 6Corporate-LevelStrategyChapter 8InternationalStrategyChapter 9CooperativeStrategiesChapter 7Acquisitions &RestructuringStrategy ImplementationChapter 10CorporateGovernanceChapter 11Structure& ControlChapter 12StrategicLeadershipChapter 13Entrepreneurship & InnovationStrategicInputsStrategicActionsStrategic OutcomesChapter 4Business LevelStrategySustainableCompetitiveAdvantageChapter 2External EnvironmentChapter 3Internal EnvironmentCoreCompetencyThe resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.StrategyAn integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.CoreCompetencyThe resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.StrategyAn integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.Business Level StrategyActions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets.CoreCompetencyThe resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.Basis for Customer SegmentationConsumer Markets1. Demographic factors (age, income, sex, etc.)2. Socioeconomic factors (social class, stage in the family life cycle)3. Geographic factors (culture, region or country differences)4. Psychological factors (lifestyle, personality traits)5. Consumption patterns (heavy, moderate, and light users)6. Perceptual factors (benefit segmentation, perceptual mapping)7. Brand loyalty patternsBasis for Customer SegmentationIndustrial Markets1. End use segments (identified by SIC code)2. Product segments (based on technological differences or production economics)3. Geographic segments (defined by boundaries between countries or by regional differences within them)4. Common buying factor segments (cut across product/market and geographic segments)5. Customer size segmentsGeneric Business Level StrategiesCostUniquenessSource of Competitive AdvantageBreadth of Competitive ScopeBroadTargetMarketNarrowTargetMarketFocused Differen-tiationCostLeadershipDifferen-tiationFocused Low CostCostLeadershipKey Criteria:Cost Leadership Business Level StrategyRelatively standardized productsFeatures acceptable to many customersLowest competitive priceRequirements:Constant effort to reduce costs through:Building efficient scale facilitiesState of the art manufacturing facilitiesSimplification of processesMinimizing costs of sales, R&D and serviceMonitoring costs of activities provided by outsidersTight control of production costs and overheadCost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINValue Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsValue Creating Activities Common to a Cost Leadership Business Level StrategyValue Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsInbound LogisticsInbound LogisticsHighly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesLocated in Close Proximity with SuppliersValue Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsOperationsOperationsEfficient Plant Scale to Minimize Mfg. CostsTiming of Asset PurchasesPolicy Choice of Plant TechnologyOrganizational LearningValue Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsOutboundLogisticsOutbound LogisticsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsEfficient Order SizesInterrelationships with Sister UnitsValue Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsMarketing & SalesNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceMarketing & SalesPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsServiceServiceEffective Product Installations to Reduce RecallsValue Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsProcurementSystems and Procedures to Find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesProcurementValue Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsTechnological DevelopmentTechnological DevelopmentEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesValue Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsHuman Resource ManagementHuman Resource ManagementConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Value Creating Activities Common to a Cost Leadership Business Level StrategyPrimary ActivitiesSupportActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsConsistent Policies to Reduce Turnover CostsEffective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production ProcessesTiming of Asset PurchasesEfficient Plant Scale to Minimize Manufacturing CostsSelection of Low Cost Transport CarriersDelivery Schedule that Reduces CostsNational Scale AdvertisingProducts Priced to Generate Sales VolumeSmall, Highly Trained Sales ForceEffective Product Installations to Reduce Frequency and Severity of RecallsEasy-to-Use Manufacturing TechnologiesInvestments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesSystems and Procedures to find the Lowest Cost Products to Purchase Raw MaterialsFrequent Evaluation Processes to Monitor Suppliers’ PerformancesLocated in Close Proximity with SuppliersPolicy Choice of Plant TechnologyOrganizational LearningEfficient Order SizesInterrelationships with Sister UnitsFirm InfrastructureFirm InfrastructureCost Effective MIS SystemsRelatively Few Management Layers to Reduce OverheadSimplified Planning Practices to Reduce Planning CostsValue Creating Activities Common to a Cost Leadership Business Level StrategyHow to Obtain a Cost Advantage1. Determine and Control Cost Drivers2. Reconfigure the Value Chain as neededAlter production processChange in automationNew distribution channelDirect sales in place of indirect salesNew advertising mediaNew raw materialBackward integrationForward integrationChange location relative to suppliers or buyersReconfiguring the Value Chainof Iowa Beef Packers (IBP)Ranch CattleShip “on the Hoof” to Rail Center (Chicago)Slaughter into sides of beef“Boxed Cuts” at MarketsOld Way:Save on shipping and cattle weight lossUtilize cheaper non-union rural laborNewWayNew Way:Locate large automated plants near ranchesProcess into “Boxed Cuts” at plantsShip cuts already “Boxed” to MarketsChoices That Drive CostsEconomies of scaleAsset utilizationCapacity utilization patternValue chain linkagesInterrelationships- Advertising & Sales- Logistics & Operations- Seasonal, cyclical- Order processing and distributionProduct featuresProduct featuresPerformanceMix & variety of productsService levelsSmall vs. large buyersProcess technologyWage levelsHiring, training, motivationThree Key Questions2.How can a group of linked value activities be regrouped or reordered?3.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 distributors1.How can an activity be performed differently or even eliminated?Effective Cost Leaders can remain profitable even when the Five Forces appear unattractiveCan frighten off New Entrants