Professional Documents
Culture Documents
Session 6
Business-Level Strategy
Our Book:
Strategic Management
(11th or 12th edition)
Author: Charles Hill
Learning Objectives
• Explain the difference between low-cost and
differentiation strategies.
• Articulate how the attainment of a
differentiated or low-cost position can give a
company a competitive advantage.
• Explain how a company executes its business-
level strategy through function level strategies
and organizational arrangements.
• Describe what is meant by the term “value
innovation.”
• Discuss the concept of blue ocean strategy, and
explain how innovation in business-level
strategy can change the competitive game in an
industry, giving the innovator a sustained
competitive advantage.
Business-Level Strategy Choices
This means that actions taken at the functional level should support the business-
level strategy, as should the organizational arrangements of the enterprise. There
must, in other words, be alignment or fit between business-level strategy,
functional strategy, and organization.
Competing Differently: Searching for a Blue Ocean
Their basic proposition is that many successful companies have built their
competitive advantage by redefining their product offering through value
innovation and, in essence, creating a new market space.
They describe the process of thinking through value innovation as searching for
the blue ocean—which they characterize as a wide open market space where a
company can chart its own course. Example: Southwest Airlines.
Competing Differently: Searching for a Blue Ocean
When thinking about how a company might redefine its market and craft a new
business-level strategy, Kim and Mauborgne suggest that managers ask
themselves the following questions:
1. Eliminate: Which factors that rivals take for granted in our industry can be
eliminated, thereby reducing costs?
2. Reduce: Which factors should be reduced well below the standard in our
industry, thereby lowering costs?
3. Raise: Which factors should be raised above the standard in our industry,
thereby increasing value?
4. Create: What factors can we create that rivals do not offer, thereby increasing
value?
Competing Differently: Searching for a Blue Ocean
Strategy in a Fragmented Industry
First, a lack of scale economies may mean that there are few, if any, cost
advantages to large size. There are no obvious scale economies in landscaping and
massage services, for example, which helps explain why these industries remain
highly fragmented.
Second, brand loyalty in the industry may primarily be local. It may be difficult to
build a brand through differentiation that transcends a particular location or
region.
Third, the lack of scale economies and national brand loyalty implies low entry
barriers. When this is the case, a steady stream of new entrants may keep the
industry fragmented. Example: The Flower business
Strategy in a Fragmented Industry
Chaining involves opening additional locations that adhere to the same basic
formulae, and that the company owns. Thus, Staples pursued a chaining strategy
when it quickly opened additional stores after perfecting its formula at its original
Boston location. Today Staples has over 2,000 stores worldwide. Starbucks too has
pursued a chaining strategy, offering the same basic formula in every store that it
opens. Its store count now exceeds 18,000 in some 60 countries.
Strategy in a Fragmented Industry
18
Franchising
19
Strategy in a Fragmented Industry
20
Strategy in a Fragmented Industry
Franchising
• Benefits: • Caveats:
– Overseas expansion with a – Revenues may not be adequate
minimum investment – Availability of a master
– Franchisees’ profits tied to franchisee
their efforts – Limited franchising
– Availability of local opportunities overseas
franchisees’ knowledge – Lack of control over the
franchisees’ operations
– Problem in performance
standards
– Cultural problems
– Physical proximity
21
Starbuck´s Coffee Criteria in Selecting Partners
22
2018 Franchise 500 Ranking
Strategy in a Fragmented Industry
Horizontal Mergers
For now, it is worth noting that although mergers and acquisitions can help a
company to consolidate a fragmented industry, the road to success when pursuing
this strategy is littered with failures. Some acquiring companies pay too much for
the companies they purchase. Others find out after the acquisition that they have
bought a “lemon” that is nowhere as efficient as they thought prior to the
acquisition. Still others discover that the gains envisaged for an acquisition are
difficult to realize due to a clash between the culture of the acquiring and
acquired enterprises.
Acquisition
Merger
Greenfield
Strategies in Embryonic and Growth Industries
Why are pioneering companies often unable to create a business model that
allows them to be successful over time and remain as market leaders?
Innovators and early adopters have very different customer needs from the
early majority.
3. Because innovators and the early majority are relatively few in number
and are not particularly price sensitive, companies serving them typically
pursue a focus model, produce small quantities of a product, and price high.
To serve the rapidly growing mass-market, large-scale mass production may
be critical to ensure that a high-quality product can be reliably produced at a
low price point.
However, there may be cases in which scale and brand, although significant, are not
sufficient to deter entry. In such circumstances there are other strategies that
companies can pursue to make new entry less likely. These strategies include product
proliferation, limit pricing, and strategic commitments.
Strategies in Embryonic and Growth Industries
Strategies to Deter Entry
1. Product Proliferation
One way in which companies try to enter a mature industry is by
looking for market segments or niches that are poorly served by incumbent
enterprises. The entry strategy involves entering these segments, gaining experience,
scale and brand in that segment, and then progressively moving upmarket. This is
how Japanese automobile companies first entered the U.S. market in the late 1970s
and early 1980s.