BA 495

R. M. Zahrowski

CHAPTER 4

STRATEGIC
ACTIONS:
STRATEGY
FORMULATION

PowerPoint Presentation by Charlie Cook

The University of West Alabama
2007 Thomson/South-Western.
All rights reserved.

Business-Level
Strategy
Strategic
Management

Seventh edition

Competitiveness and Globalization:

Concepts
Cases
Michael A. Hitt and
R. Duane
Ireland Robert E. Hoskisson

KNOWLEDGE 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.

2007 Thomson/South-Western. All rights reserved.

42

Business-Level Strategy (Defined)

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.

2007 Thomson/South-Western. All rights reserved.

43

Core Competencies and Strategy

Core
Competencies

Resources and superior capabilities that are

sources of competitive advantage over a
firms rivals

Strategy

An integrated and coordinated set of

actions taken to exploit core competencies
and gain competitive advantage

Business-level
Strategy

Providing value to customers and gaining

competitive advantage by exploiting core
competencies in individual product markets

2007 Thomson/South-Western. All rights reserved.

44

Customers: Their Relationship to

Business-Level Strategies
Who will be
served?

Key Issues
in
Business-level
Strategy

What needs will

be satisfied?

How will those

needs be satisfied?

2007 Thomson/South-Western. All rights reserved.

45

Effectively Managing Relationships with

Customers
Firms must manage all aspects of their
relationship with customers.
Reach: firms success and connection to customers
Richness: depth and detail of two-way flow of
information between the firm and the customer
Affiliation: facilitation of useful interactions with
customers

2007 Thomson/South-Western. All rights reserved.

46

Who: Determining the Customers to

Serve
Market segmentation
A process used to cluster people with similar needs
into individual and identifiable groups.

All Customers
Consumer
Markets

2007 Thomson/South-Western. All rights reserved.

Industrial
Markets

47

Market Segmentation
Consumer Markets

Industrial Markets

Demographic factors

End-use segments

Socioeconomic factors

Product segments

Geographic factors

Geographic segments

Psychological factors

Common buying factor

segments

Consumption patterns
Perceptual factors

2007 Thomson/South-Western. All rights reserved.

Customer size
segments

48

What: Determining Which

Customer Needs to Satisfy
Customer needs are related to a products
benefits and features.
Customer needs are neither right nor wrong,
good nor bad.
Customer needs represent desires in terms of
features and performance capabilities.

2007 Thomson/South-Western. All rights reserved.

49

How: Determining Core Competencies

Necessary to Satisfy Customer
Needs

Firms use core competencies to implement value

creating strategies that satisfy customers needs.
Only firms with capacity to continuously improve,
innovate and upgrade their competencies can
expect to meet and/or exceed customer
expectations across time.

2007 Thomson/South-Western. All rights reserved.

410

The Purpose of a Business-Level

Strategy
Business-Level Strategies
Are intended to create differences between the firms
position relative to those of its rivals.

To position itself, the firm must decide whether it

intends to:
Perform activities differently or
Perform different activities as compared to its rivals.

2007 Thomson/South-Western. All rights reserved.

411

Types of Potential Competitive

Advantage
Achieving lower overall costs than rivals
Performing activities differently (reducing process
costs)

Possessing the capability to differentiate the

firms product or service and command a
premium price
Performing different (more highly valued) activities.

2007 Thomson/South-Western. All rights reserved.

412

FIGURE

4.1

The External Environment

2007 Thomson/South-Western. All rights reserved.

413

Competitive Scope
Broad Scope
The firm competes in many
customer segments.

Narrow Scope
The firm selects a segment or
group of segments in the
industry and tailors its strategy
to serving them at the
exclusion of others.

2007 Thomson/South-Western. All rights reserved.

414

Types of Business-Level Strategies

Competitive Advantage

Broad
Target

Cost

Uniqueness

Cost Leadership

Differentiation

Competitive
Scope
Narrow
Target

2007 Thomson/South-Western. All rights reserved.

Integrated Cost
Leadership/
Differentiation
Focused Cost
Leadership

Focused
Differentiation

415

How to Obtain a Cost Advantage

Determine
and control
Cost Drivers

Reconfigure
Value Chain
if needed

Alter production process

Change in automation

New raw material

Forward integration

New distribution channel

New advertising media
Direct sales in place of
indirect sales

Backward integration
Change location relative
to suppliers or buyers

2007 Thomson/South-Western. All rights reserved.

416

Value-Creating Activities for Cost

Leadership
Cost-effective MIS

Few management layers

Simplified planning
Consistent policies
Effecting training
Easy-to-use manufacturing
technologies
Investments in technologies
Finding low cost raw materials

2007 Thomson/South-Western. All rights reserved.

Monitor suppliers
performances

Link suppliers products to

production processes
Economies of scale
Efficient-scale facilities
Effective delivery schedules
Low-cost transportation
Highly trained sales force
Proper pricing

417

Cost Leadership Strategy: Competitors

Rivalry with
Existing Competitors

Rivals hesitate to compete

on basis of price.

Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Due to cost leaders

advantageous position:

Bargaining
power of
suppliers

Lack of price competition

leads to greater profits.

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

418

Cost Leadership Strategy: Buyers

Bargaining Power
of Buyers
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargaining
power of
suppliers

Can mitigate buyers

power by:
Driving prices far below
competitors, causing
them to exit, thus
shifting power with
buyers back to the firm.

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

419

Value-Creating Activities and

Differentiation
Highly developed MIS
High quality replacement parts
Emphasis on quality
Worker compensation for
creativity/productivity

Superior handling of incoming

raw materials
Attractive products

Use of subjective performance

measures

Rapid response to customer

specifications

Basic research capability

Order-processing procedures

Technology

Customer credit

High quality raw materials

Personal relationships

Delivery of products

2007 Thomson/South-Western. All rights reserved.

420

Competitive Risks of Differentiation

The price differential between the differentiators product
and the cost leaders product becomes too large.
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
firms products.

2007 Thomson/South-Western. All rights reserved.

421

Focus Strategies
An integrated set of actions taken to produce
goods or services that serve the needs of a
particular competitive segment.
Particular buyer groupyouths or senior citizens
Different segment of a product lineprofessional
craftsmen versus do-it-yourselfers
Different geographic marketsEast coast versus
West coast

2007 Thomson/South-Western. All rights reserved.

422

Focus Strategies (contd)

Types of focused strategies
Focused cost leadership strategy
Focused differentiation strategy

To implement a focus strategy, firms must be

able to:
Complete various primary and support activities in a
competitively superior manner, in order to develop
and sustain a competitive advantage and earn aboveaverage returns.

2007 Thomson/South-Western. All rights reserved.

423

Factors That Drive Focused Strategies

Large firms may overlook small niches.
A firm may lack the resources needed to compete in the
broader market.
A firm is able to serve a narrow market segment more
effectively than can its larger industry-wide competitors.
Focusing allows the firm to direct its resources to certain
value chain activities to build competitive advantage.

2007 Thomson/South-Western. All rights reserved.

424

Flexible Manufacturing Systems

Computer-controlled processes used to produce
a variety of products in moderate, flexible
quantities with a minimum of manual
intervention.
Goal is to eliminate the low-cost-versus-wide
product-variety tradeoff.
Allows firms to produce large variety of products at
relatively low costs.

2007 Thomson/South-Western. All rights reserved.

425

Information Networks
Link companies electronically with their
suppliers, distributors, and customers.
Facilitate efforts to satisfy customer expectations in
terms of product quality and delivery speed.
Improve flow of work among employees in the firm
and their counterparts at suppliers and distributors.
Customer relationship management (CRM)

2007 Thomson/South-Western. All rights reserved.

426

Total Quality Management (TQM)

Systems
Emphasize total commitment to the customer
through continuous improvement using:
Data-driven, problem-solving approaches
Empowerment of employee groups and teams

Benefits
Increased customer satisfaction
Lower costs
Reduced time-to-market for innovative products

2007 Thomson/South-Western. All rights reserved.

427

Risks of the Integrated Cost

Leadership/ Differentiation Strategy
Often involves compromises
Becoming neither the lowest cost nor the most
differentiated firm.

Becoming stuck in the middle

Lacking the strong commitment and expertise that
accompanies firms following either a cost leadership
or a differentiated strategy.

2007 Thomson/South-Western. All rights reserved.

428