week 4- business level strategy Flashcards
two main strategic decisions
- cost leadership
- diffrenation
cost leadership
compete by having lower costs than competitors and hence attracting customers with lower prices on staple products. Successful business models operate on low margins/high volumes
Ex: walmart has low prices, tims, west jet, dell
difgerenation
compete by offering better quality or unique features at the same or higher prices than competitors
Unique features
Better quality
Ex: Hudson bae, starbucks, KLM, macbooks
Starbucks→ geared toward giving you extra value, the interior is nicer, better service potentially, more accommodations for orders can be made (to justify customers paying more)
Price reflects the better service so paying a premium price for better service
5 different types of business level strategies
cost leadership, differeination, focused cost leadership, focused differeinatio and integrated cost leaderhsip/ doffereination
business level strategies
Called business level strategies bc companies can be present in multiple businesses at the same time, multiple industries → talking about industry strategies keeping in mind we may be in different industries with different strategies
focused doffereination
if you take any grocery retailers that try to focus on organic food, attracting health conscious consumers and charge more (whole foods) , narrow market but the company specializes on attracting specific costumers, targeting niche
focused cost leadership
bookstore on campus that offers used textbooks. Focused on students but have better deals and prices, targeting a nice group
Why is it so difficult to have lower prices and better qualit
to provide higher quality you need to invest→ more expensive, cant justify lower prices will kill profits
Can trace the commitment to a particular strategy through
the value chain
risks to a differeination strategy
Risks of the differentiation strategy
Customers determine that the cost of differentiation is too great (strabucks losing sales to mcdonalds during the economic recession)
The means of differentiation may not provide value for which customers are willing to pay (dominos, a struggling predecessor of dominos pizza)
Experience can narrow customers perceptions of the value of a products Differentiated features (hotels vs airbnb)
Counterfeiting (fake purses, watches)
Most sensitive to economic downturns (during recession, customers tend to switch from green, chemical free household products to less expensive conventional, not eco friendly options ) → starbucks almost went bankrupt and had to close 600 stores, because differentiated products are seen as “pampering” products when you can afford them, will no longer be able to pay a premium for the extra benefits of differentiated products
risk of the cost leadership strategy
Risks of the cost leadership strategy
Must sell in large volumes to realize the intended bottom line (tims)–> tims wont be successful if they only sell a few cups of coffee, grocery stores have low profit margins as well which is why they need large volume
Source of cost avdnatage can become obsolete, as the external environment changes → ikea witht he changing environment it might be losing its traditional advtnage because customers want different things that are becoming costlier
Focus on cost may cause the firm to overlook important customer preferences (cutting corners like the lack of service at walmart and dollarama )–> ex you go to walmart, you will not get good service, no personalization (pay roll costs low), as a result you get lower prices, dollarama as well
Imitation (most computer manufacturers can now sell DTC: direct to consumer→ online and allow cuztomized building of computers, which was pioneered by dell in 1990s)–> most computer manufacturers can now sell directly to consumers from their website, easier to imitate that patented protected tech
risk of the integrated strategy
Stuck in the middle
excelling neither in cost reduction nor in differentiation
▪ cost structure is not efficient enough for attractive pricing of products; at the same time products not sufficiently differentiated to create distinct value for target customers
▪ result: the firm does not earn above-average returns
Companies like target, zara, singapore airlines are successful in this integrated strategy
How to decide what type of strategy the company has
Product→ unique, premium quality (differentiation) or staple (cost leadership)
Prices→ premium (differentiation) or affordable (cost leadership)
Target market→ narrow with specific characteristics (focused strategy) or mass market (broad strategy)
Note: not all companies have a distinct strategy, many are simply trying to survive by benchmarking against competitors. If you cant determine the type, it might mean that the strategy is lacking → stems from leadership
