Business Level Strategies

Chapter 4

Strategic choices fall into two categories:

  1. Business level strategies (generic business strategies)- are actions firms take to gain competitive advantages in a single market or industry.
  1. Cost leadership
  2. Product differentiation
  1. Corporate level strategies- are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously

Cost leadership

  1. Size differences in economies to scale lower per unit production costs:
    1. Volume of production and specialized machines
    2. Firms can build larger plants
    3. Particularly important in industries that use process manufacturing such as chemical, oil refining, paper and pulp manufacturing.
    4. Costs of constructing a processing plant with increased capacity can be expected to rise as the two-thirds power of a plants capacity.
  2. Increased employee specialization
  3. Spread overhead costs across more units produced
  1. Size differences and diseconomies to scale
    1. Physical limitations
    2. Managerial diseconomies
      1. As a firm increases in size it increases in complexity and ability of managers to control and operate efficiently becomes limited
    3. Worker de-motivation
      1. Specialized jobs can become boring
    4. Distance to markets and suppliers
  • Experience differences and learning curve economies
    1. The learning curve focuses on the relationship between the cumulative volume of production (production over time) and the average unit cost.
    2. It occurs economies to scale, cost advantages and competitive advantage
    3. Criticisms of the learning curve are (1) the acquisition of market share is expensive (2) there is no room for any other business or corporate strategies.
  1. Differential low-cost access to productive inputs
    1. Productive inputs are any supplies used by a firm in conducting its business activities; they include, among other things, labor, capital, land, and raw materials.
  1. Technological advantages independent of scale
    1. Technological hardware- machines and robots
    2. Technological software- quality of relations between labor and management, culture, and the quality of managerial controls.
  1. Policy choices
    1. Choices about the kinds of products and services they will sell that have an impact on their relative cost position.
  • Cost leadership can reduce the threat of buyers.

Likely to be rare sources of cost advantage

Less likely to be rare sources of cost advantage

Learning curve economies to scale (especially in emerging business)

Economies of scale (except when efficient plant size aprox. equals total industry demand)

Differential low-cost access to productive inputs

Diseconomies of scale

Technological software

Technological hardware (unless a firm has proprietary hardware development skills)

--

Policy choices

Basis for

costly

duplication

Source of cost advantage

History

Uncertainty

Social Complexity

Low cost duplication

1. Economies to scale

2. Diseconomies to scale

May be costly

3. Learning- curve economies

Somewhat likely

4. Technological “hardware”

Somewhat likely

5. Policy choices

Somewhat likely

Usually costly to duplicate

6. Differential low-cost access to productive inputs

Very likely

Likely

7. Technological software

Very likely

Likely

Very Likely

Escalation of commitment is when managers committed to an incorrect (cost increasing or revenue reducing) course of action increase their commitment to this action as its limitations become manifest. So... firms suffering from diseconomies of scale should turn to must turn to outside managers to assist in reducing costs.

Organizing to Implement Cost Leadership:

Firms implementing cost leadership will generally adopt functional organizational structure àeach major business functions is managed by a functional manager à who reports to the CEO

CEO is often called U-form structure “U” for unitary because there is only one person in this organization that has a broad multifunctional corporate perspective. U Form is kept as simple as possible.

Organizing to realize the full potential of cost leadership:

Organizing to realize the full potential of product differentiation:

Organization structure- functional structure with

1.      Few layers in reporting

1. Cross divisional/ cross- functional product development teams

2.      Simple reporting relationshipsà complicating reporting structures, including matrix structures where one employee reports to two or more people, is usually avoided.

2. Willingness to explore new structures to exploit new opportunities

3.      Small corporate staff

3. Isolated pockets of intense creative efforts

4.      Focus on narrow range of business functions

Management control systems

1.      Tight cost control systems

1. Broad decision-making guidelines

2.      Quantitative cost goals

2. Managerial freedom within guidelines

3.      Close supervision of labor, raw material, inventory and other costs

3. Policy experimentation

4.      A cost leadership philosophy

Compensation policies

1.      Reward for cost reduction

1. Rewards for risk-taking, not punishment for failure

2.      Incentives for all employees to be involved in cost reduction

2. Rewards for creative flair

Responsibilities of the CEO:

  • to formulate the strategy of the firm
  • to coordinate the activities of the functional specialists in the firm to facilitate the implementation of this strategy

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