MM 5012 BUSINESS STRATEGY

Summary Chapter 4

By : Pramadona (29111364)

MASTER OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS AND MANAGEMENT INSTITUT TEKNOLOGI BANDUNG 2013

MM5012 - Business Strategy - Summary of Business-Level Strategy 29111364 - Pramadona

Business-Level Strategy
Strategy is increasingly important to a firms success and concerned with making choices among two or more alternatives. Choices dictated by external environment and internal organization. The external environment includes opportunities and threats, and the internal environment includes capabilities and core competencies. While, Business-level Strategy is 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. Business-level strategy indicates the choices the firm has made about how it intends to compete in individual product markets. The choices are important because long-term performance is linked to a firms strategies We discuss several topics to examine business-level strategies. Customers are the foundation of successful business strategies, so when selecting a business-level strategy we should determine who will be served by the firm, what needs those target customers have that firm will satisfy and how those needs will be satisfied by the firm. The five business-level strategies we examine are called generic because they can be used n any organization competing in any industry. Our analysis describes how effective use of each strategy allows the firm to favorably position itself relative to the five competitive forces in the industry (see Chapter 2). In addition, we use the value chain (see Chapter 3) to show examples of the primary and support activities necessary to implement specific business-level strategies. Because no strategy is risk-free,21 we also describe the different risks the firm may encounter when using these strategies.

Customers: Their Relationship with Business-Level Strategies

There are five components in customer relationships, they are: 1. Effectively managing relationships with customers. The firms relationships with its customers are strengthened when it delivers superior value to them. Strong interactive relationships with customers often provide the foundation for the firms efforts to profitably serve customers unique needs.

MM5012 - Business Strategy - Summary of Business-Level Strategy 29111364 - Pramadona

2. Reach, richness and affiliation. The reach dimension of relationships with customers is concerned with the firms access and connection to customers. Richness, the second dimension of firms relationships with customers, is concerned with the depth and detail of the two-way flow of information between the firm and the customer. Affiliation, the third dimension, is concerned with facilitating useful interactions with customers. 3. Determining the customers to serve. Dividing customers into groups based on differences in needs Process used to cluster people with similar needs into individual and identifiable groups, for example, consumer and industrial markets 4. Determining which customer needs to satisfy. Needs are related to a products benefits and features. From a strategic perspective, a basic need of all customers is to buy products that create value for them. The generalized forms of value that goods or services provide are either low cost with acceptable features or highly differentiated features with acceptable cost. 5. Determining core competencies necessary to satisfy customer needs. Core competencies are resources and capabilities that serve as source of competitive advantage for firm over its rivals.

Purpose of Business-Level Strategies

The purpose is to create differences between firm and its competitors. To position itself differently from competitors, a firm must decide whether it intends to perform activities differently or to perform different activities. The firms business-level strategy is a deliberate choice about how it will perform the value chains primary and support activities to create unique value. Firms develop an activity map to show how they integrate the activities they perform. Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. Positions built on systems of activities are far more sustainable than those built on individual activities.

MM5012 - Business Strategy - Summary of Business-Level Strategy 29111364 - Pramadona

Types of Business-Level Strategies

When selecting a business-level strategy, firms evaluate two types of potential competitive advantages, they are lower cost than rivals, or the ability to differentiate and command a premium price that exceeds the extra cost of doing so. Two types of competitive scopes are broad target and narrow target, explained as the figure bellow.

There are five types of business-level strategy, they are: 1. Cost Leadership. The cost leadership strategy is 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. The competitive advantage is the low-cost leader and operates with margins greater than competitors. It has broad competitive scope. There are no-frill, standardized goods. It continuously reduces costs of value chain activities include inbound and outbound logistics account for significant cost. Low-cost position is a valuable defense against rivals. Powerful customers can demand reduced prices

MM5012 - Business Strategy - Summary of Business-Level Strategy 29111364 - Pramadona

2. Differentiation The differentiation strategy is an integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them. Target customers perceive product value. Customized products differentiating on as many features as possible. Example: Apples iPod. 3. Focus The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. Firms can create value for customers in specific and unique market segments by using the focused cost leadership strategy or the focused differentiation strategy. Focused Cost Leadership. It has low-cost as competitive advantage and it has narrow industry segment as competitive scope. Example: IKEA: Good design (furniture) at low prices Focused Differentiation. It has differentiation as competitive advantage and it has narrow industry segment as competitive scope. Example: IKEA: Good design (furniture) at low prices also has some differentiated features 4. Integrated Cost Leadership/Differentiation The objective of using this strategy is to efficiently produce products with some differentiated features. Efficient production is the source of maintaining low costs while differentiation is the source of creating unique value. Firms that successfully use the integrated cost leadership/differentiation strategy usually adapt quickly to new technologies and rapid changes in their external environments. Simultaneously concentrating on developing two sources of competitive advantage (cost and differentiation) increases the number of primary and support activities in which the firm must become competent. Such firms often have strong networks with external parties that perform some of the primary and support activities.