An organization's core competencies should be focused on satisfying customer needs or preferences in order to achieve above average returns. This is done through Business-level strategies. Business level strategies detail actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product or service markets. Business-level strategy is concerned with a firm's position in an industry, relative to competitors and to the five forces of competition.
Customers are the foundation or essence of a organization's business-level strategies. Who will be served, what needs have to be met, and how those needs will be satisfied are determined by the senior management.
Who are the customers?
Demographic, geographic, lifestyle choices (tastes and values), personality traits, consumption patterns (usage rate and brand loyalty), industry characteristics, and organizational size.
What are the goods and/or services that potential customers need?
Knowing ones customers is very import in obtaining and sustaining a competitive advantage. Being able to successfully predict and satisfy future customer needs is important. (Perhaps one of Compaq's mistakes was not understanding who their real customer was and what that customer -- end user -- wanted.)
How to satisfy customer needs?
Organizations must determine how to bundle resources and capabilities to form core competencies and then use these core competencies to satisfy customer needs by implementing value-crating strategies.
There are four generic strategies that are used to help organizations establish a competitive advantage over industry rivals. Firms may also choose to compete across a broad market or a focused market. We also briefly discuss a fifth business level strategy called an integrated strategy.
1. Cost Leadership – Organizations compete for a wide customer based on price. Price is based on internal efficiency in order to have a margin that will sustain above average returns and cost to the customer so that customers will purchase your product/service. Works well when product/service is standardized, can have generic goods that are acceptable to many customers, and can offer the lowest price. Continuous efforts to lower costs relative to competitors is necessary in order to successfully be a cost leader. This can include:
- Building state of art efficient facilities (may make it costly for competition to imitate)
- Maintain tight control over production and overhead costs
- Minimize cost of sales, R&D, and service.
Porter's 5 Forces Model
Earlier we discussed Porter's Model. A cost leadership strategy may help to remain profitable even with: rivalry, new entrants, suppliers' power, substitute products, and buyers' power.
How to Obtain a Cost Advantage?
- Rivalry – Competitors are likely to avoid a price war, since the low cost firm will continue to earn profits after competitors compete away their profits (Airlines).
- Customers – Powerful customers that force firms to produce goods/service at lower profits may exit the market rather than earn below average profits leaving the low cost organization in a monopoly positions. Buyers then loose much of their buying power.
- Suppliers – Cost leaders are able to absorb greater price increases before it must raise price to customers.
- Entrants – Low cost leaders create barriers to market entry through its continuous focus on efficiency and reducing costs.
- Substitutes – Low cost leaders are more likely to lower costs to entice customers to stay with their product, invest to develop substitutes, purchase patents.
- Determine and Control Cost
- Reconfigure the Value Chain as Needed
- Tunnel Vision
Value Chain – A framework that firms can use to identify and evaluate the ways in which their resources and capabilities can add value. The value of the analysis lays in being able to break the organization's operations or activities into primary (such as operations, marketing & sales, and service) and support ( staff activities including human resources management & procurement) activities. Analyzing the firm's value-chain helps to assess your organizations to what you perceive your competitors value-chain, uncover ways to cut costs, and find ways add value to customer transactions that will provide a competitive advantage.
2. Differentiation - Value is provided to customers through unique features and characteristics of an organization's products rather than by the lowest price. This is done through high quality, features, high customer service, rapid product innovation, advanced technological features, image management, etc. (Some companies that follow this strategy: Rolex, Intel, Ralph Lauren)
Create Value by:
- Lowering Buyers' Costs – Higher quality means less breakdowns, quicker response to problems.
- Raising Buyers' Performance – Buyer may improve performance, have higher level of enjoyment.
- Sustainability – Creating barriers by perceptions of uniqueness and reputation, creating high switching costs through differentiation and uniqueness.
Risks of Using a Differentiation Strategy
- Loss of Value
Porter's Five Forces Model – Effective differentiators can remain profitable even when the five forces appear unattractive.
- Rivalry – Brand loyalty means that customers will be less sensitive to price increases, as long as the firm can satisfy the needs of its customers (audiofiles).
- Suppliers – Because differentiators charge a premium price they can more afford to absorb higher costs and customers are willing to pay extra too.
- Entrants – Loyalty provides a difficult barrier to overcome. Substitutes (trans. 4-26) – Once again brand loyalty helps combat substitute products.
3. Focused Low Cost- Organizations not only compete on price, but also select a small segment of the market to provide goods and services to. For example a company that sells only to the U.S. government.
4. Focused Differentiation - Organizations not only compete based on differientation, but also select a small segment of the market to provide goods and services.
Focused Strategies - Strategies that seek to serve the needs of a particular customer segment (e.g., federal gov't).
Companies that use focused strategies may be able serve the smaller segment (e.g. business travelers) better than competitors who have a wider base of customers. This is especially true when special needs make it difficult for industry-wide competitors to serve the needs of this group of customers. By serving a segment that was previously poorly segmented an organization has unique capability to serve niche.
Risks of Using Focused Strategies:
- Maybe out focused by competitors (even smaller segment)
- Segment may become of interest to broad market firm(s)
5. Using an Integrated Low-Cost/Differentiation Strategy
This new strategy may become more popular as global competition increases. Firms that use this strategy may see improvement in their ability to:
- Adaptability to environmental changes.
- Learn new skills and technologies
- More effectively leverage core competencies across business units and products lines which should enable the firm to produce produces with differentiated features at lower costs.
Thus the customer realizes value based both on product features and a low price. Southwest airlines is one example of a company that does uses this strategy.
However, organizations that choose this strategy must be careful not to: becoming stuck in the middle i.e., not being able to manage successfully the five competitive forces and not achieve strategic competitiveness. Must be capable of consistently reducing costs while adding differentiated features.
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