Businesses level strategy

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 an organization's business-level

strategies. Demographic, geographic, lifestyle choices, personality traits,
consumption patterns, industry characteristics, and organizational size.
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.

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.

Business-Level 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.

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.

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.

To Obtain a Cost Advantage

Determine and Control Cost

Reconfigure the Value Chain as Needed

Risks

Technology
Imitation
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 and
support 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.

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.

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

Uniqueness
Imitation
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 (audio
files).
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.

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.

Focused Differentiation
Organizations not only compete based on differentiation, 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
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)

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, 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.

J. C. Penney
J. C. Penney Company, Inc. (NYSE:JCP), one of the nation's largest apparel and home
furnishings retailers, is on a mission to ensure every shopping experience is worth
the customer's time, money and effort. Whether shopping jcp.com or visiting one of
over 1,000 store locations across the United States and Puerto Rico, customers will

discover a broad assortment of products from a leading portfolio of private,

exclusive and national brands. Supporting this value proposition is the warrior spirit
of over 100,000 JCPenney associates worldwide, who are focused on the Company's
three strategic priorities of strengthening private brands, becoming a world-class
Omni channel retailer and increasing revenue per customer.

Past strategies of JCPenny

In the fall of 2011, Ron Johnson was appointed not just as CEO of JC Penney, but as
the savior responsible for breathing new life into one of the dowdiest dinosaurs in
American retail. Seventeen months and many, many mistake later, hes out of a job.
The main mistakes of Ron Johnson was
He Misread What Shoppers Want
In early 2012, Johnson announced a major overhaul of the way JC Penney does
business, with a new fair and square everyday low pricing scheme to replace the
fake prices used commonly in the past. The idea sounded greatin theory. Didnt
everyone hate those fake prices, which were inflated only so that the inevitable
discounts would seem tempting?

Well, no. Johnson thought it made sense to cut to the chase by listing realistic prices
from the get-go and foregoing nonstop sales. It does make logical sense, after all.
But shoppers arent purely logical creatures. Theyre often drawn to stores not by
the promise of fair pricing, but by the lure of hunting for deals via coupons and price
markdowns. Its all a game, and a contrived one at that. But its a game that
shoppers are accustomed to playing, and that many consciously or not like
playing, with the How Much You Saved line at the bottom of the receipt serving as
a score.

It didnt take long for people to note that Johnsons no-coupons, no-sales
experiment was failing to attract shoppers. Sales collapsed through early 2012, and
by the summer, even Johnson acknowledged the stores had made a big mistake.

He Didnt Test Ideas in Advance

And why didnt Johnson understand what JC Penneys core customers enjoyed? Well,
one reason is that he didnt really ask them. When Johnson floated plans for the
chains radical makeover, he was asked about the possibility of trying the new
pricing strategies on a limited test basis. Johnson reportedly shot down the idea,
responding, We didnt test at Apple.

The fact that JC Penneys longest-standing customers loved coupons and the
prospect of finding steals via rounds of markdowns should have never come as a
surprise to the companys CEO. Ideally, the retail chain would have also known in
advance that customers found Johnsons new three-tiered simple pricing scheme
which didnt include common shopping terms like Clearance and Saleto be
enormously confusing.

A continued sales slump forced Johnson to realize the error of his ways. JC Penney
rolled out some half-hearted discounts on Black Friday 2012, which were deemed to
be mostly underwhelming compared to 80% off deals in other stores. He flip-flopped
on use of the word sale as well; in the companys brochure for Presidents Day
weekend, the word sale was used 37 times over 24 pages of merchandise. Even
that proved to be confusing, because in stores JC Penney was listing phony
manufacturers suggested retail prices that no store ever charged.

He Alienated Core Customers

As Johnson removed their beloved coupons and sales and increasingly focused on
making JC Penney a hip destination shopping experience complete with boutique
stores within the larger store, many of the chains oldest and most loyal customers
understandably felt like they were no longer JC Penneys target market. The return
of sales hasnt proved to bring about a return of these shoppers.

He Totally Misread the JC Penney Brand

Johnson pictured coffee bars and rows of boutiques inside JC Penney stores. He
wanted a bazaar-like feel to the shopping experience, and for JC Penney to be
Americas favorite place to shop. He thought that people would show up in stores
because they were fun places to hang out, and that they would buy things listed at
full-but-fair price.

But early and often during the Johnson era, critics pointed out that JC Penney was
not the Apple Store. The latter features cutting edge consumer tech that shoppers
have grown accustomed to purchasing at full price. JC Penney, on the other hand, is
stuck with a reputation as the place your mom dragged you to buy clothes you
hated in 1984, as a Consumerist post put it. The idea that people would show up at
JC Penney just to hang out, and that its old-fashioned shoppers would be
comfortable with Johnsons radical plans like the removal of checkout counters
almost seems delusional.

Overall, He Didnt Seem to Like or Respect JC Penney

In retrospect, Johnson and JC Penney seem like a horrible match. All along, Johnson
insisted that he absolutely adored the venerable JC Penney brand. But if he loved it
so much, why was he so hell bent on dramatically changing it, rather than tweaking
and gently reshaping as needed?
Essentially, Johnson wanted JC Penney and its shoppers to be something that
theyre not. He wanted them to be more like the scene at Apple Stores, or even
Target, when in reality, there was probably more overlap with Macys, or even
Walmart. The overall impression is that Johnson would probably never shop in JC
Penney, and that he certainly didnt understand or have much respect for the
stores shoppers. If thats the case, no wonder Johnsons stint as CEO was such a
disaster.

The strategies of JCPenny, back to their market position

Following J.C. Penney's (NYSE: JCP) brush with death during the past decade, the
113-year-old company's future boils down to a three-part turnaround strategy
overseen by president and CEO-designee Marvin Ellison.
The challenge that lies ahead for the chain of department stores can't be
overstated. Since the beginning of 2006, J.C. Penney's same-store sales, which
measure sales at existing locations open at least 12 months, as well as online sales,
have dropped by a cumulative 30%.
The good news is that J.C. Penney's customers don't appear to have outright
abandoned the retailer; they're instead simply shopping less frequently, and making
smaller purchases when they do.

"We had 87 million active customers in 2011. We have 87 million active customers
today," explained CEO Myron Ullman on the company's latest conference call. "The
reason the volume is not the same is frankly businesses that were impaired [under
the previous leadership team] have not yet been fully restored."

Center core
Given this, J.C. Penney's strategy revolves not around attracting throngs of new
customers, but rather around encouraging its existing customers to buy more. This
central point is reflected in the first prong of its turnaround plan: to boost sales in its
"center core."
"The center core is really defined as Sephora, handbag, shoes, [and] fashion
jewelry," noted Ellison. "Those areas of the store that are great for cross-shopping
and what we call incremental sales attachments to the core purchases."

J.C. Penney's primary tactic for turning around its stores, in other words, is to boost
the size of customer transactions by seeking to convince shoppers to add smaller
items to their larger purchases. It's akin to putting candy bars in front of a register
at a convenience store.

Omni channel
The second prong of J.C. Penney's turnaround strategy is to evolve into a so-called
Omni channel retailer one that allows customers, in-store sales persons, and callcenter staff to effortlessly maneuver between multiple distributions channels (inperson, over the phone, online, and from mobile devices).
"We are behind in our Omni channel strategy, but we don't look at that as a
disadvantage because I think the second-mover advantage is so powerfully strong,"
says Ellison. The key challenge, he went on to note, is to transform J.C. Penney's
1,000-plus locations into "distribution points" for everything the company has to
offer, and to make the process "seamless for a customer, anyway, anytime, anyhow
she wants to shop."

Home
Finally, the third prong of J.C. Penney's turnaround strategy is to invest in its home
furnishings department, which had been sidelined in the failed rebranding attempt
of 2011-2012. This includes focusing less on so-called hardline goods such as
furniture, and more on soft line goods like towels.

"[W]e had to change the mix of Home, it was two-thirds hard home, one-third soft
home, we've made that transition, we're back to two-thirds soft home, one third
hard home," explained Ullman.

Ellison elaborated by noting that the strategy around home furnishings also
encompasses updating its products with exclusive lines from the likes of Eva
Longoria, and redesigning the actual home department "to take it from more
traditional to a much more modern view."

At the end of the day, of course, it remains to be seen whether these tactics will be
enough to reverse J.C. Penney's fortunes. The odds are certainly against the storied
retailer -- as Warren Buffett has observed in the past, "turnarounds seldom turn."
However, given the considerable odds facing the company, any sense of victory is
bound to be that much sweeter.

It was good news indeed to see J.C.Penney report a 4.4% increase in sales for 4Q14
quarter and the 2014 year. This is a standout compared to the other major retailers
who have been talking about slower sales including Macys (+2.5%), Kohls
(+3.7%), Target (+3.8%), and Walmart (+1.5%). I think it proves that many loyal
customers have come back to the company to look, shop, and buy. The outlook is
bright for J.C.Penney and that 2015 will see similar increases in sales. While such an
increase will not return sales to the $17 Billion level recorded before CEO Ron
Johnson decimated the company, but it does elevate revenues to $13 Billion. With
positive free cash flow for the year of $57 Million and liquidity at yearend of $2.1
Billion, J.C.Penney is in good financial condition positioning it for a very strong year
ahead.
J.C.Penney is embracing an Omni channel selling strategy whereby it sells
merchandise online which customers can have delivered or pick up in stores.
Internet sales increased about 12.5% in 4Q14 outpacing the 2.9% increase in total
net sales. This strong result confirms the trust customers have in J.C.Penneys core
merchandise. About 50% is private label and the rest is exclusive brands and
national brands like Dockers, Levis, Nike, Izod, etc. These are brands and labels
consumers know and trust.
New brands such as Modern Bride and Disney
departments are also important because they add excitement to the store through
newness which is also important to the loyal J.C.Penney customer.

At the same time it is important to move on from brands and merchandising ideas
that no longer work. As part of the cleanup following the previous administration,
J.C.Penneys current management has eliminated 14 vendors that did not fit into the
assortment going forward. Most recently Joe Fresh Kids was closed since it did not
appeal to the J.C.Penney customer.
That optimistic about 2015 for J.C.Penney. It has done many things right as it moves
down the road of recovery. However, business wont be easy for them or any
retailer. The competitive environment will not abate. The competition is relentless.
With more emphasis on off price merchandise by Nordstroms Rack, Neman Marcus
Last Call Studios, TJXs phenomenal growth, and Macys prioritizing off-price for
2015, the customer will be shopping more and more in value oriented stores. It will
be a challenge for every retailer to compete with these operations since it touches
every price line.
As long as J.C.Penney remains focused on serving its core
customers and financially disciplined, which that was, 2015 should be a year of solid
growth for this storied retailer.