Business-level Strategy
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Where We Are…
Economic Value Creation
We learned that VRI resources and capabilities
help the firm create value in their product
markets, more so than competitors
What is Economic Value Creation?
The difference between:
A buyer’s maximum willingness to pay for a product /
service
And the firm’s total cost to produce it
Economic Value Creation
Economic Value Creation
Companies try to maximize (V-C)
That is, they try to create economic value and
capture as much of it as possible
Thus, competitive advantage can be based on:
Higher value (V) because of superior product
attributes
A relative cost ( C) advantage over rivals
In addition, value (V) can be narrow or broad
A narrow value proposition caters to a specific
niche or narrowly-defined customer group
A broad value proposition is attractive to a very
broad customer base
Generic Business Strategies
Company Profiles
Netjets
Rolls Royce
Cipla
Nestlé
Class Activity!
Categorize these four companies (Netjets, Rolls
Royce, Cipla and Nestlé) into the four quadrants
below:
Business-Level Strategy
Answers the question “how should we compete
in a specific product-market?”
Who will we serve in this product-market?
What needs will we satisfy in this product-market?
How exactly will we satisfy these needs?
Differentiation
Differentiators:
Seek to create higher value (V) than competitors,
while somewhat containing the added cost to
create the value
Differentiation
The Value Chain
Every company undertakes a chain of functional
activities to convert inputs into outputs
Primary activities include the production and
delivery of the product, marketing, sales and after-
sales service
Secondary activities (aka support activities)
support the primary activities through infrastructure,
information systems, human resources, R&D, etc.
The Value Chain
Differentiation
Important value chain activities:
Product innovation and R&D, resulting in unique
product features
Superior customer service
Marketing and promotion
Complements
Value-Creating Activities
In relation to the five forces…
Threat of Entry
Reputational barriers require significant resource
investment
Bargaining Power of Suppliers
Low; component costs may be passed on to customers
Bargaining Power of Buyers
Inverse relationship between loyalty and price sensitivity
Product Substitutes
Loyalty reduces threat of substitutes
Rivalry against existing competitors
Customers are loyal purchasers of differentiated products
Risks
High price differential; low value differential
Price for differentiated product may be too high
compared to cost leaders
Counterfeit goods
Think Rolex watches and Louis Vuitton clutches
Cost Leadership
Cost leaders:
Seek to create acceptable value (V) compared to
competitors, while minimizing the cost (C) to create
this value
Cost Leadership
Cost Leadership
Important activities and drivers:
Reducing cost
Cost of input factors
Raw materials, capital, labor, information systems, etc.
Process improvements and innovations
Lean Manufacturing, Six Sigma, etc.
Economies of scale
Economies of Scale
Value Creating Activities
In relation to the five forces…
Threat of Entry
Economies of scale/scope; ahead of the curve
Bargaining Power of Suppliers
Can absorb some price increases from suppliers
Bargaining Power of Buyers
Difficult for buyers to find lower prices
Product Substitutes
Difficult for substitutes to be attractive price-wise
Rivalry against existing competitors
Rivals hesitate to compete on the basis of price
Risks
Unacceptable value (V)
Due to singular focus on cost reduction, customers
might find products to have lower than
acceptable levels of features
Think McDonalds…
Obsolescence
Processes might become obsolete due to radical
innovations
Generic Business Strategies
Focus Strategies
Apart from the two broad strategies, firms might
decide to target narrow markets:
Buyer groups
Youth/senior citizens
Company executives
Product line segments
Professional painter groups
Geographic markets
West vs. East coast; single city/local market
Socioeconomic classes
UHNW Individuals
Risks
Risk of using focused strategies:
Large (i.e., broad) players may find the niche
attractive
Competitors may out-focus the focuser
Customer needs may regress towards mean
Blue Ocean Strategy: CL/D
Blue Ocean Strategy: CL/D
Efficiently produce products with differentiated
attributes
Efficiency: Sources of low cost
Differentiation: Source of unique value
Although appealing, a major risk is getting ‘stuck
in the middle’
Cost structure is not low enough for attractive
pricing of products, and products are not
sufficiently differentiated to create value for target
customers
E.g., iPhone 5C
Summing Up…