Chapter 5: Business level strategy
Chapter 5 con't
Chapter 6: corporate level strategy
Chapter 6 con't
100

1. Three Generic Strategies - Overall cost leadership 

- Differentiation

- focus

1. is based on: •Creating a low-cost position relative to a firm’s peers.

•Managing relationships throughout the entire value chain to lower costs.

- •Products and/or services that are unique and valued.

•Emphasis on nonprice attributes for which customers will gladly pay a premium.

- •Narrow product lines, buyer segments, or targeted geographic markets.

▪Advantages obtained either through differentiation or cost leadership.

100

1. Focus

1.  A focus strategy is based on the choice of a narrow competitive scope within an industry.

•A firm selects a segment or group of segments (or niche) and tailors its strategy to serve them.

•A firm achieves competitive advantages by dedicating itself to these segments exclusively.

2. 

A focus strategy has two variants.

1.Cost focus.

•Creates a cost advantage in its target segment.

•Exploits differences in cost behavior.

2.Differentiation focus.

•Differentiates itself in its target market.

•Exploits the special needs of buyers.

100

1. Making Diversification Work

2. •A firm may diversify into related businesses.

- •A firm may diversify into unrelated businesses.

1. Diversification initiatives must create value for shareholders through:

•Mergers and acquisitions.

•Strategic alliances.

•Joint ventures.

•Internal development.

Diversification should create synergy.

•Business 1 plus Business 2 equals more than two.

2. 

•Benefits derive from horizontal relationships.

•Sharing intangible resources such as core competencies in marketing.

•Sharing tangible resources such as production facilities, distribution channels via vertical integration.

-•Benefits derive from hierarchical relationships.

•Value creation derived from the corporate office.

•Leveraging support activities in the value chain.

100

Means of Diversification

Diversification can be accomplished via:

•Mergers and acquisitions.

•Divestments.

•Pooling resources of other companies with a firm’s own resource base through strategic alliances and joint ventures.

•Internal development through corporate entrepreneurship or new venture development.

200

1. Overall Low-Cost Leadership

1. Overall cost leadership involves:

•Aggressive construction of efficient scale facilities.

•Vigorous pursuit of cost reductions from experience.

•Tight cost and overhead control.

•Avoidance of marginal customer accounts.

•Cost minimization in all activities in the firm’s value chain, such as research and development, service, sales force, and advertising.

2. 

Cost leadership requires learning to lower costs through experience: the experience curve.

•With experience, unit costs of production processes decline as output increases.

•This strategy also requires competitive parity.

•Being “on par” with competitors with respect to low-cost, differentiation, or other strategic product characteristics.

•Permits cost leaders to translate cost advantages directly into higher profits.

200

1. Improving Competitive Position vis-à-vis the Five Forces: Focus

2. Pitfalls of Focus

1. 

An overall focus strategy

•Creates higher entry barriers due to cost leadership or differentiation or both.

•Can provide higher margins that enable the firm to deal with supplier power.

•Reduces buyer power because the firm provides specialized products or services.

•Focused niches less vulnerable to substitutes.

2. 

•Erosion of cost advantages within the narrow segment. 

•Highly focused products and services still subject to competition from new entrants and from imitation.

•Focusers too focused to satisfy buyer needs.

200

1. Related Diversification

2. Leveraging Core Competencies

1. 

Related diversification enables a firm to benefit from horizontal relationships across different businesses.

Economies of scope allow businesses to:

•Leverage core competencies.

•Sharing related activities.

•Enjoy greater revenues, enhance differentiation.

Related businesses gain market power by:

•Pooled negotiating power.

•Vertical integration.

2. 

Core competencies reflect the collective learning in organizations. Can lead to the creation of value and synergy if:

•They create superior customer value.

•The value-chain elements in separate businesses require similar skills.

•They are difficult for competitors to imitate or find substitutes for.

200

Mergers and Acquisitions

Mergers involve a combination or consolidation of two firms to form a new legal entity.

•On a relatively equal basis.

•Are relatively rare.

Acquisitions involve one firm buying another either through stock purchase, cash, or the issuance of debt. 

Mergers and acquisitions help a firm develop synergy.

•Leveraging core competencies.

•Sharing activities.

Building market power

300

1. Improving Competitive Position vis-à-vis the Five Forces: Cost Leadership

2. Pitfalls of Cost Leadership

1. 

An overall low-cost position:

•Protects a firm against rivalry from competitors.

•Protects the firm against powerful buyers.

•Provides more flexibility to cope with demands from powerful suppliers who want to increase input costs.

•Provides substantial entry barriers due to economies of scale and cost advantages.

•Puts the firm in a favorable position with respect to substitute products.

2. •Too much focus on one or a few value chain activities.

•Increase in the cost of the inputs on which the advantage is based.

•Strategy can be too easily imitated.

•A lack of parity on differentiation.

•Reduced flexibility.

•Obsolescence of the basis of a cost advantage.

300

1. Combination Strategies

2. Improving Competitive Position vis-à-vis the Five Forces: Combination

1. 

•Combining overall low-cost and differentiationstrategies can take several forms.

•Automated and flexible manufacturing systems allow for mass customization.

•Data analytics allows firms to customize product and services while using resources efficiently.

•Exploitation of the profit pool concept creates a competitive advantage.

•Using technology, firms can unscale, relying on suppliers or customers to provide critical inputs to the process.

2. 

An integrated/combination overall low-cost and differentiation strategy

•Creates higher entry barriers due to both cost leadership and differentiation.

•Can provide higher margins that enable the firm to deal with supplier power.

•Reduces buyer power because of fewer competitors.

•Overall value proposition reduces threat from substitutes.

300

1. Related Diversification: Sharing Activities

2. Market Power

1. 

Corporations can also achieve synergy by sharing activities across their business units.

Sharing tangible and value-creating activities can provide payoffs.

•Cost savings through elimination of jobs, facilities and related expenses, or economies of scale.

•Revenue enhancements through increased differentiation and sales growth.

2. 

Market power can lead to the creation of value and synergy through:

•Pooled negotiating power.

•Gaining greater bargaining power with suppliers and customers.

•Vertical integration: a firm becomes its own supplier or distributor through:

•Backward integration.

Forward integration.

300

Mergers and Acquisitions: Divestment Objectives

Divestment objectives include:

•Cutting the financial losses of a failed acquisition.

•Redirecting focus on the firm’s core businesses.

•Freeing up resources to spend on more attractive alternatives.

•Raising cash to help fund existing businesses.

400

Differentiation

A differentiation strategy can take many forms:

•Prestige or brand image.

•Quality.

•Technology.

•Innovation.

•Features.

•Customer service.

•Dealer network.

2. 

Differentiation requires:

•A level of cost parity relative to competitors.

•Integration of multiple points along the value chain.

•Superior material handling operations to minimize damage.

•Low defect rates to improve quality.

•Accurate and responsive order processing.

•Personal relationships with key customers.

•Rapid response to customer service requests.

Differentiation on multiple fronts.

400

Pitfalls of Combination Strategies

Firms that fail to attain both overall low-cost and differentiation strategies may end up with neither and become “stuck in the middle.”

Firms can also underestimate the challenges and expenses associated with coordinating value-creating activities in the extended value chain.

Firms can also miscalculate sources of revenue and profit pools in the firm’s industry

400

1. Related Diversification: Vertical Integration, Issues

2. Vertical Integration, Transaction Costs

1. 

•Is the company satisfied with the quality of the value that its present suppliers and distributors are providing?

•Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable source of future profits?

•Is there a high level of stability in the demand for the organization’s products?

•Does the company have the necessary competencies to execute the vertical integration strategies?

•Will the vertical integration initiatives have potential negative impacts on the firm’s stakeholders?

2. 

Transaction cost perspective.

Every market transaction involves some transaction costs.

•Search costs.

•Negotiating costs.

•Contract costs.

•Monitoring costs.

•Enforcement costs.

•Need for transaction specific investments.

Administrative costs.

400

Strategic Alliances and Joint Ventures: Motives

Strategic alliances and joint ventures are cooperative relationships between two (or more) firms with potential advantages.

•Ability to enter new markets through:

•Greater financial resources.

•Greater marketing expertise.

•Ability to reduce manufacturing or other costs in the value chain.

•Ability to develop and diffuse new technologies.

500

1. Improving Competitive Position vis-à-vis the Five Forces: Differentiation

2. Pitfalls of Differentiation

1. 

An overall differentiation strategy

•Creates higher entry barriers due to customer loyalty.

•Provides higher margins that enable the firm to deal with supplier power.

•Reduces buyer power because buyers lack suitable alternatives.

•Establishes customer loyalty and hence less threat from substitutes.

2. 

•Uniqueness that is not valuable.

•Too much differentiation.

•Too high a price premium.

•Differentiation that is easily imitated.

•Dilution of brand identification through product line extensions.

•Perceptions of differentiation may vary between buyers and sellers.

500

1. Unrelated Diversification

2. Goal of Diversification = Risk Reduction?

1. 

Unrelated diversification enables a firm to benefit from vertical or hierarchical relationships between the corporate office and individual business units through:

•The corporate parenting advantage.

•Providing competent central functions.

•Restructuring to redistribute assets.

•Asset, capital, and management restructuring.

•Portfolio management.

BCG growth/share matrix.

2. 

Diversification can reduce variability in revenues and profits over time. However,

•Stockholders can diversify portfolios at a much lower cost.

•Stockholders don’t have to worry about integrating the acquisition into their portfolio. 

•Economic cycles are difficult to predict, so why diversify?

Choice to diversify must be part of an overall diversification strategy.

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