Business Level-Strategy A 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. Every firm chooses at least one business-level strategy. Thus business-level strategy is the core strategy, the strategy that the firm forms to describe how it intends to compete in a product market. Because customers are the foundation of successful business-level strategies and should never be taken for granted. This chapter present information about customers that is relevant to business- level strategies. In terms of customers, when selecting a business-level strategy the firm determines who will be served, what needs those target customers have that it will satisfy how those needs will be satisfied. Selecting customers and deciding which of their needs the firm will try to satisfy, as well as how it will do so, are challenging tasks. Global competition has created many attractive options for customers, thus making it difficult to determine the strategy to best serve them.
The Purpose of a Business Level Strategy The purpose of a business-level strategy is to create differences between the firms position and those of its competitors. To position itself differently from competitors, a firm must decide whether it intends to perform activities differently or to perform different activities.
Types of Business Level Strategies Firms choose from among five business-level strategies to establish and defend their desired strategic position against competitors:
Five Business-Level Strategies
Each business-level strategy helps the firm to establish and exploit a particular competitive advantage within a particular competitive scope. How firms integrate the activities they perform within each different business-level strategy demonstrates how they differ from one another.
A. Cost Leadership Strategy Cost leadership strategy is an integrated set of action taken to produce goods or services with features that are acceptable to customers at the lowest cost, Mattheus Biondi 29113056 YP49B Business Strategy Chapter 4 & RM 7 relative to that of competitors. This is how firms implement a cost leadership strategy : 1. Rivalry with existing competitors Having the low-cost position is valuable to deal with rivals. Because of the cost leaders advantageous position, rivals hesitate to compete on the basis of price, especially before evaluating the potential outcomes of such competition. 2. Bargaining power of buyers Powerful customers can force a cost leader to reduce its prices, but not below the level at which the cost leaders next-most-efficient industry competitor can earn average returns. 3. Bargaining power of suppliers The cost leader operates with margins greater than those of competitors. Cost leaders want to constantly increase their margins by driving their costs lower 4. Potential entrants Through continuous efforts to reduce costs to levels that are lower than competitors, a cost leader becomes highly efficient. 5. Product substitutes A product substitute becomes an issue for the cost leader when its features and characteristics. In terms of cost and differentiated features, are potentially attractive to the firms customers. 6. Competitive risk of cost leadership strategy The cost leadership strategy is not risk free. One risk is that the processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors innovations.
B. Differentiation Strategy The differentiation strategy is 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. This is how firms using the differentiation strategy : 1. Rivalry with existing competitors Customers tend to be loyal purchasers of products differentiated in ways that are meaningful to them. As their loyalty to a brand increases, customers sensitivity to price increases is reduced. The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry. 2. Bargaining power of buyers Customers are willing to accept a price increase when a product still satisfies their perceived unique needs better than does a competitors offering. 3. Bargaining power of suppliers Because the firm using the differentiation strategy charges a premium price for its products, suppliers must provide high-quality components, driving up the firms costs 4. Potential entrants Customer loyalty and the need to overcome the uniqueness of a differentiated product present substantial barriers to potential entrants. 5. Product substitutes Mattheus Biondi 29113056 YP49B Business Strategy Chapter 4 & RM 7 Firms selling brand-name goods and services to loyal customers are positioned effectively against product substitutes. 6. Competitive risk of cost leadership strategy One risk of the differentiation strategy is that customers might decide that the price differential between the differentiators product and the cost leaders product is too large
C. Focus Strategies The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. 1. Focused cost leadership strategy Focused on low cost, in this strategy the firms offers home furnishings for customer that combine good design, function and acceptable quality with low price. So, it can be a cost leader. 2. Focused differentiation strategy This strategy focus on differentiation to cerate value for their customer. 3. Competitive risk of focus strategies By using the cost leadership or the differentiation the company have the same risk by using that strategy in the wider industry.
D. Integrated Cost Leadership / Differentiation Strategy This strategy involves engaging in primary and support activities that allow a firm to simultaneously pursue low cost and differentiation. 1. Flexible Manufacturing Systems The goal of an FMS is to eliminate the low cost versus product variety trade-off that is inherent in traditional manufacturing technologies. Firms use an FMS to change quickly and easily from making one product to making another. 2. Formation Networks An effective CRM system provides a 360-degree view of the companys relationship with customers, encompassing all contact points, business processes, and communication media and sales channels 3. Total Quality Management Systems Total Quality Management Systems is a managerial innovation that emphasizes an organizations total commitment to the customer and to continuous improvement of every process through the use of data-driven, problem-solving approaches based on empowerment of employee groups and teams. 4. Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy The potential to earn above average returns by successfully using the integrated cost leadership/ differentiation strategy is appealing. The integrated strategy is becoming more common and perhaps necessary in many industries because of technological advances and global competition.
SIA is the most cost effective operator, on 2007 they cost per available seat kilometer was the lowest between the other competitor such as European Airlines, US Airlines, etc. the also successfully executes dual strategies. SIA offers world class services and the same time is a cost leader. They offer premium class and LCC at the same time. This airlines also never posted loss since its established in 1972. They executes dual strategies by managing innovating in both centralized and decentralized manner, being a technology leader and follower, achieving standardization and personalization in its processes, and providing services excellence cost effectively. SIA achieving service excellence cost effectively by managing two main assets which is planes and people. They spends more than their rivals in key areas such as : buying new aircraft, depreciating aircraft, training, labor cost on flights and innovation. And also their spends less at partly as a consequence on : price per aircraft, fuel maintenance and repair, salaries, sales and administration and back office technologies. SIA also concern in their technology that they use. Unlike many market leaders in airlines industry, SIA engages in small improvement in functions that dont touch the customer. SIA introduced technological break through to save cost. They being a little pragmatic innovator also withdrew services which customers dont like or cause problems. Like they do in 2004, SIA outsourced many of its IT functions so it could focused on their core business. SIA services processes like those of most other airlines. They using standardization for personalization. SIA airlines institutionalizes personalization by creating a services culture through recruitment, training and rewards. The crew members gets access to personal information like name, birthday from CRM for bringing delight to customers experience. And then, the training programs such as transforming customer service teach cabin crews how to anticipate customer needs. And then they also bring more crew members than competitors but these crews help the airline provide unmatched service. Emulating SIA its not just about following its best practices. Its all about implementing two seemingly contradictory strategies. This involve four broad principle. First, Harness the power of your people and culture because the competitor can easily copy your strategies and organizational culture, but they can copy the environment in SIA. Second, make good use of technology because technology cant transcend apparent contradictions cost effective service excellent. Third, utilize the power of business ecosystems which is company must create business ecosystems rather than ecosystems. Fourth, make investment decisions strategically, this about strategic alignment not financial returns.