Technology & Organisational Change
Business Level Strategy
Week 4
Copyright Guy Harley 2004
Outline
 Customers, Who, What and How?
 Types of business level strategy
 Cost leadership
 Differentiation
 Focused cost leadership
 Focused Differentiation
 Cost leadership\differentiation
Copyright Guy Harley 2004
Strategic Competitiveness
To achieve strategic competitiveness, firms must:
 Identify who their customers are
 Determine customer needs/preferences
 Focus on satisfying the needs of some group of
customers
 Select a strategy that enables them to satisfy
customer needs
Copyright Guy Harley 2004
Internet Competitive Advantage
In the Internet age, firms can maintain competitive
advantage by:
 Thinking continuously about accessing &
connecting with customers (reach)
 Maintaining info with depth & detail for and from
customers (richness)
 Determining how to build relationships with
customers (relationship)
Copyright Guy Harley 2004
Determining which customers to serve
 Need to identify customers on basis of needs or
preferences
 Firm must determine whether differences in
needs/preferences are significant
 If not, can offer a standardised product.
Copyright Guy Harley 2004
Basis for Customer Segmentation
 Customer Markets
 Demographic factors
 Socio-economic factors
 Geographic factors
 Psychological factors
 Consumption patterns
 Perceptual factors
Copyright Guy Harley 2004
Basis for Customer Segmentation (cont.)
 Industrial Markets
 End-use segments
 Product segments
 Geographic segments
 Common buying factor segments
 Customer Size segments
Copyright Guy Harley 2004
Standardised Product
When would a firm offer a standardised product?
 When it can’t easily be customised or
differentiated
 Or when firm’s core competencies are best
suited to producing standardised products.
 Typically offer them at lowest competitive price
as they follow a cost leadership strategy.
Copyright Guy Harley 2004
Increasing segmentation of markets
 Availability of sophisticated info processing
technologies allows firms to identify unique
bundles of customer characteristics and needs
 Competitors are becoming adept at identifying
small but strategically relevant differences in
customer needs
 Trend towards smaller and smaller segments
Copyright Guy Harley 2004
Determining what needs to satisfy
 Customers want needs satisfied and they want
value
 Need to identify key customer groups, needs
and preferences.
 Thus customer knowledge must be a priority for
top level managers since they determine policy,
technology etc
Copyright Guy Harley 2004
Customer knowledge
 Becomes more important as firms attempt to
perpetuate or sustain competitive advantage. By
listening to customers, firms can correctly
anticipate their future needs and create product
innovations ahead of competitors- first mover
advantage
Copyright Guy Harley 2004
Core Competencies
Determining core Competencies to satisfy
customer needs
 Need to decide how to bundle resources & core
competencies to satisfy customer needs to by
implementing value creating strategies
Copyright Guy Harley 2004
Core Competencies
This means that:
 Firms must improve their ability to convert
innovation and new technologies into
commercial products
 New products should be based on core
competencies or technology
 New products must meet present or future
needs
Copyright Guy Harley 2004
Generic Strategies
 Now look at 4 generic strategies, and how they
relate to the 5 competitive forces, the
applicability of the value chain, risks associated
with each
 A firms position in an industry relative to
competitors and to the 5 forces of competition
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Rivalry with existing competitors
Bargaining power of suppliers
Bargaining power of buyers
Potential entrants
Product substitutes
Copyright Guy Harley 2004
Generic BusinessLevel Strategies
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Copyright Guy Harley 2004
Source of Competitive Advantage
Cost
Uniqueness
Cost
Leadership
Differentiation
Focused
Low Cost
Focused
Differentiation
Generic strategy: Cost-leadership
 Offers relatively standardised product –
minimum differentiation at lowest competitive
price
 Reducing price is not necessarily a cost
leadership strategy- need to give consumer
value- includes quality
Copyright Guy Harley 2004
Cost reduction strategies
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Building efficient scale facilities
Tight control of production & overhead costs
Minimising costs of sales, R&D and service
State of the art manufacturing technologies
Copyright Guy Harley 2004
Critical focus
 Efficiency
 Cost reduction
 Still can’t ignore sources of differentiation that
customers value- e.g. styling, minimal levels of
service, quality
Copyright Guy Harley 2004
Strategy 1:Cost Leadership
 Even when competitive forces are strong, a firm
that has cost leadership can still earn above
average profits.
Copyright Guy Harley 2004
Rivalry with existing competitors
 Achieving the lowest cost position means that
competitors will hesitate to compete on basis of
price because in a price war, the low cost firm
will continue to earn profits after competitors
have competed away their profits
Copyright Guy Harley 2004
Bargaining power of buyers
 Achieving low cost position provides some
protection against powerful customers who
attempt to drive down prices
 If customers drive prices below the cost of the
next most efficient firm, the firm might choose to
exit the market, leaving the low cost firm in a
monopoly position
Copyright Guy Harley 2004
Bargaining power of suppliers
 Cost leadership strategy enables a firm to
absorb greater amount of cost increases fro
powerful suppliers before it must raise prices
 If has dominant market share, might be able to
force suppliers to lower prices
Copyright Guy Harley 2004
Potential Entrants
 Firms generally must produce & sell in large
volumes to have cost leadership- this acts as a
barrier to entry why?
Copyright Guy Harley 2004
Product substitutes
 To retain customers the low cost leader can
more easily reduce prices to maintain the pricevalue relationship and maintain customers
Copyright Guy Harley 2004
Cost Leadership
Competitive risks of the cost leadership strategy:
 Tech innovations by competitors could eliminate
advantage
 Over focus on efficiency might cause lack of
focus on consumer preferences
 Competitors might imitate low cost leaders value
chain configuration
Copyright Guy Harley 2004
Strategy 2: Differentiation
 Value is provided through the unique features of
the product
 Can charge premium price
 Price charged must exceed the cost of the
differentiation
 Focus on product innovation and product
features
Copyright Guy Harley 2004
Means of differentiation
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Superior quality
Unusual or unique features
More responsive customer service
Rapid product innovation
Advanced technological features
Engineering design
Additional features
Image of prestige
Copyright Guy Harley 2004
Achieving above average returns
 Even when competitive forces are strong
Copyright Guy Harley 2004
Rivalry with existing competitors
 Brand loyalty means that customers will be less
sensitive to price increases. As long as the firm
satisfies the differential needs of customers it
may be insulated from price base competition
Copyright Guy Harley 2004
Bargaining power of buyers
 Product considered unique
 Reduces customer sensitivity to price
Copyright Guy Harley 2004
Bargaining power of suppliers
 Differentiator can absorb a greater level of cost
increase from powerful suppliers through its
higher margins
Copyright Guy Harley 2004
Potential entrants
 Principal barrier is customers loyalty
Copyright Guy Harley 2004
Product substitutes
 Brand loyalty insulates differentiated products
Copyright Guy Harley 2004
Differentiation Strategy
Competitive risks of differentiation strategy:
 Customers may decide the cost of uniqueness is
too high
 Firms means of differentiation no longer of value
to customers
 Customer learning may influence customer
perception of value
 counterfeiting
Copyright Guy Harley 2004
Strategy 3: focus
 Firms focus on small segments or niches
 Why follow a focus strategy?
 Able to serve niche more effectively
 Needs are so special that industry wide
competitors choose not to meet them
 Can be based on cost leadership or
differentiation
Copyright Guy Harley 2004
Focused cost leadership strategy
 Generally targets the smallest buyers in the
industry
Copyright Guy Harley 2004
Focused differentiation strategy
 Customised products for small segments
 Successful when quantities involved are too
small for industry wide competitors, or when the
degree of customisation requested is beyond
capabilities of the industry wide differentiator
Copyright Guy Harley 2004
Competitive risks of focus strategies
 Competitors may successfully focus on an even
smaller segment of the market
 Industry-wide competitor may recognise the
attractiveness of the segment
 Preferences of the narrow segment may become
similar to those of the wider market
Copyright Guy Harley 2004
Integrated cost-leadership/differentiation
 Integrating generic strategies may enable them
to:
 Adapt quickly to environmental change
 Learn new skills and technology
 More effectively leverage core competencies
across business units and product lines
 Produce differentiated products at a relatively
low cost
Copyright Guy Harley 2004
Integrated cost leadership/differentiation
Benefits
 Differentiation enables firm to charge premium
price
 Cost leadership allows firm to charge lowest
price
Copyright Guy Harley 2004
Integrated cost leadership/differentiation
Products from integrated cost
leadership/differentiation strategy are:
 Less differentiated than if firm pursued just a
differentiation strategy and
 Costs not as low as if pursued cost leadership
strategy
Copyright Guy Harley 2004
Integrated cost leadership/differentiation
To overcome Competitive Risks must be able to:
 Focus consistently on reducing costs
 Add differentiated features that customers value
and for which they are willing to pay a higher
price
 Avoid becoming ‘stuck in the middle’ by failing to
consistently pay attention to the competitive
requirements of either or both generic strategies.
Copyright Guy Harley 2004
Competitive dynamics
Copyright Guy Harley 2004
Outline
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Increased rivalry
Model of competitive dynamics & rivalry
Likelihood of attack
Likelihood of response
Firms abilities to take action and respond
Outcomes of inter-firm rivalry
Copyright Guy Harley 2004
New ways of competing
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Bring new products to the market more quickly
Use of new technology
Diversifying product line
Shifting product emphasis
Consolidation of industries
Combining on-line selling with traditional
Copyright Guy Harley 2004
Changing Competitive Environment
Reasons for changing competitive environment
 Attention on global market
 Advances in ICTs- more info, faster decision
making
 Innovation
 Cooperation between former competitors in
development of new technology or formation of
strategic alliances
Copyright Guy Harley 2004
Competitive dynamics
 When one firm takes action, so do others
Copyright Guy Harley 2004
Model of competitive dynamics & rivalry
 Competitive rivalry exists when firms jockey with
one another in pursuit of advantageous market
position
 Exists because of competitive asymmetry- i.e.
firms differ in terms of resources, capabilities,
core competencies & the opportunities and
threats in their environments
 Competition results in mutual
interdependence
Copyright Guy Harley 2004
A firm’s
strategic conduct
is dynamic in
nature
Actions taken
by one firm
elicit responses
from
competitors
Competitive
Dynamics
Actions and
responses shape the
competitive positions
of each firm’s
business-level
strategy
Competitive
responses lead
to additional
actions from the
firm that acted
originally
Model of Inter-firm Rivalry
 Awareness- whether the attacking/responding
firm is aware of a potential attacker or
respondent.
 Motivation- incentives that firm has to
attack/respond when attacked
 Market commonality- extent to which firms
compete in same market
Copyright Guy Harley 2004
Multipoint competition
 When firms overlap in several markets
(geographic or product)
 High levels of commonality reduce the likelihood
of competitive interaction- see Strategic Focusairlines p163
Copyright Guy Harley 2004
Resource similarity
 Intensity of competition often based on potential
for response- attackers are generally not
motivated to target a rival that is likely to retaliate
 Firms with dissimilar resources are more likely to
attack
Copyright Guy Harley 2004
Likelihood of attack
 The model tells us that the firm’s motivation and
awareness are developed from competitor analysis of
market commonality and resource dissimilarity.
 First mover
 Take an initial competitive action
 Have the resources, capabilities & core competencies
that to Gain competitive advantage through innovative
and entrepreneurial actions
Copyright Guy Harley 2004
First Mover
First mover hopes to:
 Gain sustainable competitive advantage
 Earn above average returns until competitors
respond effectively
 Gain customer loyalty
Copyright Guy Harley 2004
First Mover
Disadvantage of first mover
 Inability to predict success of the action
 Second movers through imitation can avoid high
development costs
Copyright Guy Harley 2004
Second Movers
 Firms that respond to first movers competitive
action
 Quick response may allow second mover to:
 Capture some of the initial customers and
gain a degree of brand loyalty
 Avoid some of the risks of the first mover
 Learn from mistakes and successes
 Avoid market development costs
Copyright Guy Harley 2004
Late movers
 Respond to competitive action after
considerable time
 Performance generally suffers
Copyright Guy Harley 2004
Model of Interfirm Rivalry:
Likelihood of Attack and Response
Drivers of
Competitive
Behaviour
Awareness
Motivation
Capability
Competitor
Analysis
Market
Commonality
Resource
Similarity
Interfirm Rivalry:
Attack & Response
Likelihood of Attack
First Mover Incentives
Likelihood of Response
Type of Competitive
Action
Actor’s Reputation
Dependence on the
Market
Resource Availability
Ability for
Action and
Response
Relative Size
Speed
Innovation
Quality
Feedback
Outcomes
Competitive
Market Types
Slow, Standard
or Fast Cycle
Competitive
Outcomes
Sustained
Competitive
Advantage
Temporary
Advantage
Evolutionary
Outcomes
Entrepreneurial
Growth-Oriented
or Market-Power
Actions
Likelihood of response
 Depends on
 Type of action
 Reputation of competitor taking the action
 Competitors resource availability
Copyright Guy Harley 2004
Firm’s ability to take action and respond
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Relative size of the firm within market
Speed of competitive actions and responses
Extent of innovation by firms in the industry
Quality of firms products
Copyright Guy Harley 2004
Outcomes of inter-firm rivalry
 Slow cycle markets-strongly shielded resource
positions (monopoly)
 Standard cycle- more closely associated with
Porter-oligopoly
 Fast cycle- largely impossible to achieve
sustained competitive advantage
Copyright Guy Harley 2004
Competitive dynamics and industry evolution outcomes
Firm Resource & Market Strength
Key Task
Key Task
Key Task
Key Task
Exploiting
Open Niches
(Blind Spots) &
Competitive
Uncertainty
Exploiting
Factors of
Production
Exploiting
Market
Position
Renewal
Maintenance
Decline
Growthoriented
Actions
Market-power
Actions
Renewal
Actions
Entrepreneurial
Actions
Emerging Stage Growth Stage
Mature Stage Elaboration Stage
Time