SMJ #4 Student name: __________________ Chapter 4 Business-level strategy − How to win or survive competition? The external analysis points to the direction of opportunity that an organization might be able to seize and generate profit. The internal analysis further assess the match of the organizational capability to see if it is realistic for the organization to pursue the particular opportunity. In the case discussion of Amazon Kindle Fire (Hitt et al., 2017, page C-13), we further assess the business opportunities and how Kindle Fire needs to formulate an effective business-level strategy to take advantage of the emerging market of reading digital content. Internal analysis reveals that Amazon has superior capabilities in its supply chain management function, which has contributed to its success in implementing cost-leadership strategy, which is defined as “an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors” (Hitt et al, 2017, p. 118). However, such core competence is not a guarantee for sustainable competitive advantage because the competitors are able to either imitate the business model, such as Barnes & Noble’s Nook device, using the same large-scale delivery to capitalize on the profit margin of digital content; or find substitutable strategic alternatives such as Apple’s superior capability in producing a better device, iPad. Apple is a prime example to illustrate differentiation strategy, which refers to “an integrated set of actions taken to produce goods or services (at an acceptable costs) that customers perceive as being different in ways that are important to them” (Hitt et al., 2017, p. 122). − How do we decide on business-level strategy? Both cost-leader strategy and differentiation strategy are taking a customer-centric approach. Successful firms need to be able to identify and satisfy a sizable customer base whose decisions to purchase are the lifeblood of all business organizations. Hence, the formulation of business level strategy should be based on identifying the target market. A successful firm actively manages relationship with the customers to identify 1) who will be served, 2) what needs those target customers have that it will satisfy, and 3) how those needs will be satisfied. Sometimes, corporations may find its unique competitive advantage in serving the needs of a competitive segments and utilize focus strategy (Hitt et al., 2017, p. 127). Examples of specific market segments include 1) a particular buyer group (e.g. youths or senior citizens), 2) a different segment of a product line (e.g. products for professional painters or the do-it-yourself group), or 3) a different geographic market (e.g. northern or southern Italy by using a foreign subsidiary). Once a unique market segment is identified, the firm will further decide on whether using focused cost leadership or focused differentiation strategy (Hitt et al., 2017, p. 117). Reference Amazon Kindle Fire Case, what are the potential target markets? Which target market will be most ideal for Amazon’s cost-leadership strategy? Why? ____________________________________________________________________________ 1 SMJ #4 _____________________________________________________________________________ ____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ ____________________________________________________________________________ _____________________________________________________________________________ − Based on Porter’s Five Force model, what are the major advantages and disadvantages of using cost leadership and differentiation strategies (Hitt et al., 2017, p. 118-125)? ____________________________________________________________________________ _____________________________________________________________________________ ____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ ____________________________________________________________________________ _____________________________________________________________________________ ____________________________________________________________________________ _____________________________________________________________________________ ____________________________________________________________________________ _____________________________________________________________________________ Since there are pros and cons associated with each generic strategy, a firm may potentially maximize the benefit of both strategies by adopting an integrated cost-leadership and differentiation strategy. However, such strategy requires complex organizational capabilities which strive to maintain low cost through efficient production as well as creating unique value through differentiation. Reference: Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2017). Strategic management cases: competitiveness and globalization. Cengage Learning. 2 PART THREE: STRATEGY FORMULATION Chapter 4 Business-Level Strategy MGT431 Spring 2018 Learning Objectives 1. Define business-level strategy. 2. Market segmentation • Discuss the relationship between customers and business-level strategies in terms of who, what, and how. 3. Explain the differences among business-level strategies. • Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy. • Describe the risks of using each of the business-level strategies. 4–2 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. 4–3 Customers Oriented Business-Level Strategies Who will be served? Key Issues in B usiness-level S tra teg y Wha t needs will be sa tisfied? How will those needs be sa tisfied? 4–4 Market Segmentation (Table 4.1) Consumer Markets 1.Demographic factors (age, income, sex, etc.) 2.Socioeconomic factors (social class, stage in the family life cycle) 3.Geographic factors (cultural, regional, and national differences) 4.Psychological factors (lifestyle, personality traits) 5.Consumption patterns (heavy, moderate, and light users) 6.Perceptual factors (benefit segmentation, perceptual mapping) Industrial Markets 1. End-use segments (identified by Standard Industrial Classification [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 segments S M J 4: what are the potential target market segment for Amazon Kindle Fire? Who? What needs? How will Amazon be able to satisfy the needs? 1–5 Amazon Kindle Fire SWOT Strength • Elastic Compute Cloud (EC2) and Simple Storage Service (S3) • Warehousing capability • Amazon Prime membership • Innovation capability of the device Opportunity • Media junkies • Children & Mobil gamers • Higher Education • Revenue sources: content, commerce, advertising, app marketplace Weakness • Low profit margin: 5% • Aggressive content pricing model: $9.99 resulted in the publishers’ retaliation • Can’t read e-books purchased outside of Amazon Threat • The B&N Nook’s free Wii-Fi access to read the entire B&N books • iPad: the sweet spot for a media device between smartphone and laptop • Google Android devices Identification of strategic alternatives  Develop education gaming    Provide open source online learning    Pro: increase higher education market share Con: R&D costs to increase processing speed Pro: increase higher education market share Con: partnership with other platforms Prime membership promotion for educators and students   Pro: increase higher education market share Con: bundled sales that further cut down profit margin Competitive Scope  Broad Scope   The firm competes in many customer segments. Narrow Scope  4–8 The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others. Business Level Strategies 4–9 Cost Leadership Strategy  An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors.  Product Characteristics   Relatively standardized (commoditized) products  Features broadly acceptable to many customers  Lowest competitive price Cost saving actions required by this strategy  4–10 As primary activities, inbound logistics and outbound logistics often account for much of the total cost to produce some goods and services. Walmart’s Value-Creating Activities for Cost Leadership 4–11 Cost Leadership Strategy: Advantages  Due to cost leader’s advantageous position:      4–12 Rivalry with Existing Competitors mitigate buyers’ power mitigate suppliers’ power Frighten off new entrants Mitigate threat of substitutes  Valuable position  Investment in new features  buy intellectual property and patents developed by potential substitutes T hrea t of new entra nts Riva lry a m ong com peting firm s T hrea t of substitute products B a rg a ining power of suppliers B a rg a ining power of buyers Cost Leadership Strategy: Risks  When the low-cost leader is challenged to increase value to customers,    reducing prices adding product features without raising prices. Competitive Risks    4–13 Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations. Too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation. Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy. Differentiation Strategy  An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.   4–14 Focus is on non-standardized products Appropriate when customers value differentiated features more than they value low cost Apple’s Value-Creating Activities and Differentiation 4–15 Differentiation Strategy: Advantages  T hrea t of new entra nts Riva lry a m ong com peting firm s T hrea t of substitute products  B a rg a ining power of suppliers B a rg a ining power of buyers    4–16 brand loyalty to differentiated product offsets price competition reduce customer sensitivity to price increases absorbing price increases due to higher margins new products must surpass proven products at cheaper price brand loyalty increases switching costs to substitutes Competitive Risks of Differentiation   The price differential between the differentiator’s product and the cost leader’s product becomes too large. Differentiation ceases to provide value for which customers are willing to pay.   4–17 Experience narrows customers’ perceptions of the value of differentiated features. Counterfeit goods replicate the differentiated features of the firm’s products. Homework   SMJ4 Business Case Analysis Clinic on Friday    Voluntary : Send draft by Thursday 12 pm Receive confirmation and appointment for Dr. Liou’s one-onone consultation at JS330 Business Case Analysis Essay (50 points) due Friday midnight Focus Strategies  An integrated set of commitment and actions taken to produce goods or services that serve the needs of a particular competitive market segment.  Particular buyer group: youths or senior citizens  Different segment of a product line: professional craftsmen vs. do-ityourselfers  Different geographic markets—east coast vs. west coast Focused differentiation strategy 4–19 Focused cost leadership strategy Focus Strategies (cont’d)  Factors     Large firms may overlook small niches. A firm may lack the resources needed to compete in the broader market. Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage. Risks    4–20 “out focused” by its competitors. A large competitor may set its sights on a firm’s niche market. Customer preferences in a niche market converge with broad market Integrated Cost Leadership/ Differentiation Strategy  Pros  adapt quickly to environmental changes.  learn new skills and technologies more quickly.  effectively leverage its core competencies while competing against its rivals. 4–21 Cons • Becoming neither the lowest cost nor the most differentiated firm and becoming “stuck in the middle” e.g. Radio Shack, • Lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy e.g. JC Penny Capabilities required to implement the integrated strategy  Commitment to strategic flexibility    Flexible manufacturing systems (FMS)  Computer-controlled, modularized processes used to produce a flexible quantities with a minimum of manual intervention  eliminate the “low-cost-versus-wide product-variety” tradeoff Information networks (CRM)  Link companies electronically with their suppliers, distributors, and customers.  Customer relationship management (CRM) Total quality management (TQM) systems  continuous improvement using    4–22 data-driven, problem-solving approaches. empowerment of employee groups and teams. More effective in production cost reduction than differentiation Ch. 4 Key Terms        Business-level strategy Market segmentation Cost-leadership strategy Differentiation strategy Focused cost-leadership strategy Focused differentiation strategy Integrated cost-leadership/integration strategy Homework  SAP Q&A 1: Feb. 20-22  List 15-20 questions relation to:   Vision/mission Current market segmentation      Key market dimensions? broad vs. narrow? Value chain activities including HR, Finance, Operation, Marketing, etc. Milestone 4 International analysis Due March 4 (Sunday) midnight Topic 4 Current Event due on Feb. 21 (Wednesday) midnight Milestone 4 Internal Analysis  Value Chain Analysis   Assessment of Sustainable Competitive Advantage   What is your overall assessment of the firm’s key resources and capabilities? Do they provide the firm with a sustainable competitive advantage? What are the firm’s weaknesses? Financial Statement Analysis   Are the functional areas of the firm well organized? Is there effective communication among them? Are human resource strategies in place to provide for continual training and development of personnel? What is the nature of the firm’s performance appraisal systems? Do employees seem happy? Based on the financial reports in the past two years, report the relevant financial ratios, such as profit margin, return on investment, asset turnover, current ration, etc. Does the firm’s performance over the past few years reflect a well-formulated and implemented strategy? Summary of Strength and Weakness  How effectively is the current strategy exploiting the firm’s strengths in resources and capabilities and defending against its weaknesses?
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