Business Policy - Chapter 4

a coordinated set of commitments/actions that the firm uses to gain a competitive advantage

this is done by exploiting core competencies in specific product markets

who will be served?

what needs will be satisfied?

how will those needs be satisfied?

consumer markets or industrial markets

market segmentation - a process used to cluster people with similar needs into individual, identifiable groups

customer need are related to a product's benefits and features

customer needs are not right, wrong, good, or bad

customer needs represent desires in terms of features and performance capabilities

firms must decide how to use core competencies to implement value creating strategies that satisfy target customers' needs

only firms with the capacity to continuously improve, innovate, and upgrade their competencies can expect to achieve this

1. achieving lower overall costs than rivals...performing activities differently (reducing process costs)

2. processing the capability to differentiate the firm's product/service and command a premium price (performing different (more highly valued) activities

1. broad scope...the firm competes in many customer segments

2. narrow scope...the firm focuses on a particular segment (or group of segments) to tailor its strategy around

1. cost leadership (low cost, broad target)

2. focused cost leadership (low cost, narrow target)

3. differentiation (distinctiveness, broad target)

4. focused differentiation (distinctiveness, narrow target)

5. integrated cost leadership / differentiation strategy

a strategy aimed at producing goods/services with features that are acceptable to customers at the lowest cost

products are relatively standardized...with broadly accepted features...and the lowest competitive price

rivals are hesitant to compete on the basis of price

thus, lack of price competition leads to greater profits

can mitigate buyers' power by driving prices as low as possible to cause competitors to exit the industry

can mitigate suppliers' power by being able to:

-being able to absorb slight cost increases due to low cost positioning

- being able to make very large purchases, reducing the chance of suppliers using power

can scare off new entrants due to...

-their need to enter the industry on a large scale in order to be cost competitive

- the time it takes to overcome the industry learning curve

the cost leadership strategy allows firms to...

- lower prices in order to maintain its value position

- make investments to add features unavailable in substitutes

- buy intellectual property and patents developed by potential substitutes

- processes used to produce and distribute products may become obsolete due to competitors' innovations

- too much focus on cost reductions may occur at the expense of customers' perceptions

- competitors may successfully imitate the cost leader's strategy

a strategy used to produce goods/services (at an acceptable cost) that customers perceive as being different in ways that are important to them

- focus is on non-standardized products

- appropriate when customers value differentiated features more than they value low cost

- lower buyers' costs

- raise performance of your product

- create sustainability through customer perceptions of uniqueness and through customer reluctance to switch to non-unique products

the strategy defends itself against competitors...because customer's brand loyalty to differentiated products offsets price competition

can mitigate buyers' power because well differentiated products reduce customer sensitivity to price increases

can mitigate suppliers' power by...

- absorbing price increases due to higher margins

- having the customers pay for higher supplier prices because buyers are loyal to differentiated brands

can defend against new entrants because...

- new products must surpass proven products

- new products must be at least equal to performance of proven products, while simultaneously being offered at lower prices

this strategy is well positions against substitutes because...

- brand loyalty to a differentiated product tends to reduce customers' switching brands

- there is a huge gap in price between the differentiated product (higher cost) and the cost leader's product (low cost)

- differentiation can cease to provide value for which customers are willing to pay

- counterfeit goods replicate the differentiated features of the firm's products

a strategy used to produce goods/services that serve the needs of a particular competitive segment

- particular buyer group (youth / senior citizens)

- different segment of a product line (professional craftsmen / DIY-ers)

- different geographic markets (east coast / west coast)

1. focused cost leadership strategy

2. focused differentiation strategy

...compete various primary and support activities in a competitively superior manner...in order to develop and sustain a competitive advantage and earn above-average returns

- a focusing firm may be "out-focused" by its competitors

- a large competitor may set its sights on a firm's niche market

- customer preferences in niche markets may change to more closely resemble those of the broader market

commitment to strategic flexibility is necessary for implementation of this strategy

- flexible manufacturing systems (FMS)

- information networks (CRM)

- total quality management systems (TQM)

1. often involves compromises ... becoming neither the lowest cost nor the most differentiated firm

2. becoming "stuck in the middle" ... lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy