When implementing a focus strategy the firm seeks to

BUS 499, Week 4: Business-Level Strategy, Competitive Rivalry, and Competitive Dynamics

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Narration

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Introduction

Welcome to Senior Seminar in Business Administration.

In this lesson, we will discuss Business-Level Strategy, Competitive Rivalry, and Competitive Dynamics.

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Objectives

Upon completion of this lesson, you will be able to:

Identify various levels and types of strategy in a firm.

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Supporting Topics

In order to achieve this objective, the following supporting topics will be covered:

Customers: their relationship with business-level strategies;

The purpose of a business-level strategy;

Types of business-level strategies;

A model of competitive rivalry;

Competitor analysis;

Drivers of competitive actions and responses;

Competitive rivalry;

Likelihood of attack;

Likelihood of response; and

Competitive dynamics.

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Customer Relationships

Strategic competitiveness results only when the firm is able to satisfy a group of customers by using its competitive advantages as the basis for competing in individual product markets. A key reason firms must satisfy customers with their business-level strategy is that returns earned from relationships with customers are the lifeblood of all organizations. The most successful companies try to find new ways to satisfy current customers and/or meet the needs of new customers.

The firm’s relationships with its customers are strengthened when it delivers superior value to them. Strong interactive relationships with customers often provide the foundation for the firm’s efforts to profitably serve customers’ unique needs.

The reach dimension of relationships with customers is concerned with the firm’s access and connection to customers. Richness is concerned with the depth and detail of the two-way flow of information between the firm and the customer. Affiliation is concerned with facilitating useful interactions with customers.

Deciding who the target customer is that the firm intends to serve with its business-level strategy is an important decision. Companies divide customers into groups based on differences in the customers’ needs to make this decision. Dividing customers into groups based on their needs is called market segmentation, which is a process that clusters people with similar needs into individual and identifiable groups.

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Customer Relationships, continued

After the firm decides who it will serve, it must identify the targeted customer group’s needs that its good or services can satisfy. Successful firms learn how to deliver to customers what they want and when they want it. In a general sense, needs are related to a product’s benefits and features. Having close and frequent interactions with both current and potential customers helps firms identify those individuals’ and groups’ current and future needs.

As explained in previous lessons, core competencies are resources and capabilities that serve as a source of competitive advantage for the firm over its rivals. Firms use core competencies to implement value-creating strategies and thereby satisfy customers’ needs. Only those firms with the capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and hopefully exceed customers’ expectations across time.

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Purpose of a Business-Level Strategy *

The purpose of a business-level strategy is to create differences between the firm’s position and those of its competitors. To position itself differently from competitors, a firm must decide whether to perform activities differently or to perform different activities. Thus, the firm’s business-level strategy is a deliberate choice about how it will perform the value chain’s primary and support activities to create unique value.

Firms develop an activity map to show how they integrate the activities they perform. Positions built on systems of activities are far more sustainable than those built on individual activities.

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Types of Business-Level Strategies, continued*

Most firms choose from among five business-level strategies to establish and defend their desired strategic position against competitors. These competitive advantages are:

Cost leadership;

Differentiation;

Focused cost leadership;

Focused differentiation; and

Integrated cost leadership or differentiation.

Based on the nature and quality of its internal resources, capabilities, and core competencies, a firm seeks to form either a cost competitive advantage or a uniqueness competitive advantage as the basis for implementing its business-level strategy.

There are also two types of competitive scopes: broad and narrow target. As the name implies, a broad target market seeks to use their competitive advantage on an industry-wide basis while a narrow competitive advantage intends to serve the needs of a narrow target customer group. As shown in the figure above, a firm could also strive to develop a combined competitive advantage.

None of the five business-level strategies shown is inherently or universally superior to the others. The effectiveness of each strategy is contingent both on the opportunities and threats in a firm’s external environment and on the strengths and weaknesses derived from the firm’s resource portfolio.

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Cost Leadership

The cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Firms using the cost leadership strategy commonly sell standardized goods or services to the industry’s most typical customers.

Cost leaders’ goods and services must have competitive levels of quality that create value for customers. At the extreme, concentrating only on reducing costs could result in the firm efficiently producing products that no customer wants to purchase. In fact, such extremes could lead to limited potential for innovation, employment of lower-skilled workers, poor conditions on the production line, accidents, and a poor quality of work-life for employees.

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Differentiation Strategy

The differentiation strategy is an integrated set of actions taken to produce goods or services that customers perceive as being different in ways that are important to them. While cost leaders serve a typical customer in an industry, differentiators target customers for whom value is created by the manner in which the firm’s products differ from those produced and marketed by competitors.

Firms must be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay. When a product’s differentiated features are produced at noncompetitive costs, the price for the product can exceed what the firm’s target customers are willing to pay.

When the firm has a thorough understanding of what its target customers value, the relative importance they attach to the satisfaction of different needs, and for what they are willing to pay a premium, the differentiation strategy can be successful.

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Focus Strategies

Firms choose a focus strategy when they intend to use their core competencies to serve the needs of a particular industry segment or niche to the exclusion of others. Examples of specific market segments that can be targeted by a focus strategy include:

A particular buyer group;

A different segment of product line; or

A different geographic market.

Thus, the focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment.

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Check Your Understanding

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Competition

Firms operating in the same market, offering similar products, and targeting similar customers are competitors.

Competitor rivalry is the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous market position.

A sequence of firm-level moves, rivalry results from firms initiating their own competitive actions and then responding to actions taken by competitors. Competitive behavior is the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position.

Firms competing against each other in several product or geographic markets are engaged in multimarket competition.

All competitive behavior, that is, the total set of actions and responses taken by all firms competing within a market, is called competitive dynamics.

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A Model of Competitive Rivalry *

Competitive rivalry evolves from the pattern of actions and responses as one firm’s competitive actions have noticeable effects on competitors, eliciting competitive responses from them. This pattern suggests that firms are mutually interdependent.

The competitive rivalry model as shown above, is a sequence of activities commonly involved in competition between a particular firm and each of its competitors. This model presents a straightforward model of competitive rivalry at the firm level; this type of rivalry is usually dynamic and complex. Companies can use the model to understand how to be able to predict competitors’ behavior and reduce the uncertainty associated with competitors’ actions.

Next, we will describe each components of the model in detail.

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Competitor Analysis *

A competitor analysis is the first step the firm takes to be able to predict the extent and nature of its rivalry with each competitor. Market commonality and the resource similarity of a firm determine the extent to which the firms are competitors. Market commonality refers to the number of markets in which firms compete against each other.

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Market Commonality

Firms sometimes compete against each other in several markets that are in different industries. This situation finds competitors coming into contact with each other several times, a condition called market commonality. More formally, market commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each.

Firms competing against one another in several or many markets engage in multimarket competition.

Firms competing in several markets have the potential to respond to a competitor’s actions not only within the market in which the actions are taken, but also in other markets where they compete with the rival.

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Resource Similarity

Resource similarity is the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount. Firms with similar types and amounts of resources are likely to have similar strengths and weaknesses and use similar strategies.

When performing a competitor analysis, a firm analyzes each of its competitors in terms of market commonality and resource similarity.

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Drivers of competitive actions*

The drivers of competitive behavior as shown in the competitive model are awareness, motivation and ability.

Market commonality and resource similarity influence these drivers. In turn, the drivers influence the firm’s competitive behavior.

Awareness, which is a prerequisite to any competitive action or response taken by a firm, refers to the extent to which a firm competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity. A lack of awareness can lead to excessive competition, resulting in negative effect on all competitors’ performance.

Motivation, which concerns the firm’s incentive to take action or to respond to a competitor’s attack, relates to perceived gains and losses. Thus, a firm may be aware of competitors but may not be motivated to engage in rivalry with them if it perceives that its position will not improve or that its market position won’t be damaged if it doesn’t respond.

And, in some instance, a firm may be aware of the markets it shares with competitors and be motivated to respond to an attack, but lack the ability to do so. Ability relates to each firm’s resources and the flexibility they provide.

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Strategic and Tactical Actions

Firms use both strategic and tactical actions when forming their competitive actions and competitive responses in the course of engaging in competitive rivalry.

A competitive action is a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position.

A competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action.

A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse.

A tactical action or a tactical response is a market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse.

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Likelihood of Attack *

In addition to the competitive analysis, and the drivers of competitive behavior, the likelihood of attack and response affects competitive rivalry. Some of the factors for the likelihood of attack are: first-mover incentives, organizational size, and quality.

First-Mover Incentives is a firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position. In general, first movers allocate funds for product innovation and development, aggressive advertising, and advanced research and development. Some of the benefits of being a first-mover are:

First. Earning above-average returns until its competitors respond to its action.

Second. Gaining loyalty of customers who may become committed to the goods or services that first made them available.

And, third. Gaining market share that can be difficult for competitors to take during future competitive rivalry.

Being a first-mover carries some risk too. For example, it is difficult to accurately estimate the returns and the cost to develop a product innovation can be substantial, reducing the slack available to support further innovation.

There are also second-movers that typically respond to first mover’s through imitation and late-movers who respond a significant amount of time after the first and second movers respond.

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Likelihood of Attack, continued *

An organization’s size also affects the likelihood it will take competitive actions as well as the types and timing of those actions. In general, small firms are more likely to launch competitive actions and tend to do it more quickly while large firms initiate limited number or types of actions along with more strategic actions during a given period.

In addition, quality affects competitive rivalry. The firm evaluating a competitor whose products suffer from poor quality can predict declines in the competitor’s sales revenue until the quality issues are resolved.

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Likelihood of Response *

The success of a firm’s competitive action is affected by the likelihood that a competitor will respond to it as well as by the type and effectiveness of that response. In addition to market commonality, resource similarity and awareness, motivation, and ability, firms evaluate three other factors—type of competitive action, reputation, and market dependence.

There are different types of competitive action. Competitive responses to strategic actions differ from responses to tactical actions. In general, strategic actions elicit fewer total competitive responses because strategic responses involve a significant commitment of resources and are difficult to implement and reverse. In addition, the time needed to implement a strategic action and to assess its effectiveness can delay the competitor’s response to that action. In contrast, a competitor likely will respond quickly to a tactical action.

The second factor is actor’s reputation. A reputation is a positive or negative attribute ascribed by one rival to another based on past competitive behavior. A positive reputation may be a source of above-average returns, especially for consumer goods producers. Thus, a positive corporate reputation is of strategic value and affects competitive rivalry.

And, lastly, market dependence affects the likelihood of a firm’s response. Market dependence, denotes the extent to which a firm’s revenues or profits are derived from a particular market. In general, competitors with high market dependence are likely to respond strongly to attacks threatening their market position.

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Competitive Dynamics

Whereas competitive rivalry concerns the ongoing actions and responses between a firm and its competitors for an advantageous market position, competitive dynamics concern the ongoing actions and responses taking place among all firms competing within a market for advantageous positions.

Competitive dynamics differ in slow-cycle, fast-cycle, and standard-cycle markets. The sustainability of the firm’s competitive advantages differs across the three market types.

Slow-cycle markets are those in which the firm’s competitive advantages are shielded from imitation commonly for long periods of time and where imitation is costly. Thus, competitive advantages are sustainable in slow-cycle markets.

Fast-cycle markets are markets in which the firm’s capabilities that contribute to competitive advantages aren’t shielded from imitation and where imitation is often rapid and inexpensive. Thus, competitive advantages aren’t sustainable in fast-cycle markets. Firms competing in fast-cycle markets recognize the importance of speed.

Standard-cycle markets are markets in which the firm’s competitive advantages are moderately shielded from imitation and where imitation is moderately costly. Competitive advantages are partially sustainable in standard-cycle markets, but only when the firm is able to continuously upgrade the quality of its capabilities, making the competitive advantages dynamic.

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Check Your Understanding

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Summary

We have reached the end of this lesson. Let’s take a look at what we have covered.

First, we discussed customer relationships. Strategic competitiveness results only when the firm is able to satisfy a group of customers by using its competitive advantages as the basis for competing in individual product markets. A key reason firms must satisfy customers with their business-level strategy is that returns earned from relationships with customers are the lifeblood of all organizations. The most successful companies try to find new ways to satisfy current customers and/or meet the needs of new customers.

Next we looked at the purpose of a business-level strategy. Business-level strategy is created to by a firm to position itself differently from competitors. At this point, a firm must decide whether to perform activities differently or to perform different activities.

We also looked at five business-level strategies types which are used to establish and defend a firm’s desired strategic position against competitors. These competitive advantages are:

Cost leadership;

Differentiation;

Focused cost leadership;

Focused differentiation; and

Integrated cost leadership or differentiation.

Next we discussed a model of competitive rivalry. This model is a sequence of activities commonly involved in competition between a particular firm and each of its competitors. In this model, we looked at competitive analysis, drivers of competitive behavior, inter-firm rivalry and outcomes.

We concluded the lesson with a discussion on types of markets. These include slow-cycle, fast-cycle, and standard-cycle markets.

This completes this lesson.