Chp5. Business-Level Strategy: Creating and Sustaining Competitive Advantages

Cost focus

firm strives to create a cost advantage in its target segment

Porters 5 forces: Focus

-focus on where your business will be successful; when you are focusing on costs and your region you lose economies of scale -buyer power when you provide specialized services -specializing on niches you can avoid tax from substitute market

Cost leadership value chain

Integrate value along value chain- if you are cost leader you have to be cost leader across value chain.

Stages of the Industry life cycle

Introduction > Growth > maturity > decline

How to achieve cost leadership?

Spreading costs over volume; achieve effectiveness and economies of scale; value repetition

Both variants of the focus strategy rely on

providing better service than broad-based competitors that are trying to serve the focusers target segment

Industry life cycle:

the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry

Firms achieve and sustain differentiation advantages and attain above-average performance when...

their price premiums exceed the extra costs incurred in being unique

Industry life cycle Stage: Maturity

-no more competitors entering market -Pretty much fixed income -you want to increase efficiency to reduce costs -No more growth in customer base -This is where price wars start

competitive parity

A firm's achievement of similarity, or being "on par" with competitors with respect to low cost, differentiation, or other strategic product characteristics.

Porters 5 forces: Differentiation

- customer loyalty minimizes threat of substitutes -customer loyalty puts threat of entrants at a higher risk -provides protection against rivalry since brand loyalty lowers customer sensitivity to prices and raises customer switching costs

Porters 5 forces: Cost Leadership

- protects from rivalry because prices is so low it prevents competition -when cost goes up people switch to substitutes -when you drive your prices down the prices for substitutes becomes less elastic

Differentiated value chain

Integrate value along value chain- you have to be different across the entire value chain. (expensive coffee shop cant skimp on milk)

3 Types of Generic Strategies

Overall cost leadership, differentiation, focus

Differentiation takes take many forms:

Prestige or band names, quality, innovation, features, customer service

Industry life cycle Stage: Decline

You want to extend product lifecycle as long as possible. But know when to exit the market and stop investing, reduce costs

Breakaway point

a break in the industry tendency to incrementally improve products along specific dimensions, characteristics of the product life cycle, by offering products that are still in the industry but are perceived by customers as being different

Differentiation focus:

a firm seeks to differentiate in its target market

Overall cost leadership must attain a level of ________ __________ relative to competitors

competitive parity

Industry life cycle Stage: Introduction

new product that is not known to customers; poorly defined mkt segments; low sales growth; need for financial support -increase market awareness

Business Level Strategy

A strategy designed for a firm or a division of a firm that competes within a single business.

Example of breakaway point

Pc computers now are marketed to gamers because everyone uses laptops

Cost Leadership based on:

appeal to the industry wide market using a competitive advantage based on low cost

Focus Strategy has two variants:

1. cost focus 2. differentiation focus

Generic Strategies

Basic types of business-level strategies based on breadth of target market (industry wide vs. narrow market segment) and type of competitive advantage (low cost. vs uniqueness)

The pitfall of cost leadership: What is one thing that will cause prices to rise no matter what?

If there is an increase to your inputs on which the competitive advantage is based.

Industry life cycle Stage: Growth

Strong increase in sales; growing competition, developing brand recognition. (sometimes it better to be a second mover and let someone else take the risk)

Experience Curve (cost leadership needs this)

The decline in unit costs of production as cumulative output increases

cost leadership vs differentiated value chain

cost leadership= focuses on saving costs differentiated= focuses on providing value

Differentiation must attain a level of _______ _______ relative to competitors

cost parity

Differentiation is Based on

creating products and/or services that are unique and valued. Here, the primary emphasis is on "non-price" attributes for which customers will gladly pay a premium

Focus is based on

directing attention (or "focus") toward narrow product lines, buyer segments, or targeted geographic markets, and they must attain advantages through either differentiation or cost leadership

competitive parity allows cost leaders to..

translate cost advantage directly into higher profits (Your quality needs to be good enough, or else low cost wont make a difference)

Cost Parity

you want to start with a bare minimum product then ask "what can i add to this to justify the costs?" adding things that the market finds valuable. Bringing best features. When you do this you can't just go crazy in terms of cost