What is Business-Level Strategy?

o Strategic choices fall into two large categories: Business-Level strategies- are actions firms take to gain competitive advantages in a single market or industry Corporate-Level Strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously o The two business level strategies are cost leadership and product differentiation, they are often referred to as generic business strategies due to their importance What is Cost Leadership? o Cost Leadership Business Strategy focuses on gaining advantages by reducing its costs to below those of all its competitors o Sources of cost advantages for firms include: Size differences and economies of scale Size differences and diseconomies of scale Experience differences and learning curve economies Differential low-cost access to productive inputs Technological advantages independent of scale Policy choices o One of the most widely cited sources of cost advantage for a firm is its size Up to some point larger firms have a cost advantage over smaller firms o Economies of scale exist when the increase in firm size is associated with lower costs

$ Per Unit Cost of Production

Low Cont. o

X Volume of Production

High

As the volume of production in a firm increases, the average cost per unit decreases until some optimal volume of production (point x) is reached, after which the average costs per unit of production begin to rise because of diseconomies of scale Why higher volumes of production in a firm can lead to lower costs: Firms can use specialized machines Firms can build larger plants Firms can increase employee specialization

Firms can spread overhead costs across more units produced When the volume of production gets too large: Physical limits to efficient size Managerial diseconomies Worker de-motivation Distance to markets and suppliers

The Learning Curve and the Cost of Production Per Unit Costs

Cumulative Volume of Production

Cont. o

Productive Inputs are any supplies used by a firm in conducting its business activities (they include: labor, capital, land and raw materials) o A firm that has differential low-cost access to one or more of these factors is likely to have lower economic costs compared to rivals o Policy Choices- the ability for a firm to choose the kinds of products and services they will sell which inurn impact there relative cost position The Value of Cost Leadership o A cost leadership competitive strategy helps reduce the threat of new entrants by creating cost-based barriers to entry. Often new entrants will enter using another business strategy rather than compete on cost (i.e. product differentiation) o A low cost leader reduces the threat to rivalry because its rivals have higher costs o A low cost leader has a lot lower chance of being threatened by a supplier. This is because Cost leadership is based on large volumes of production; larger volumes of production imply large purchases of raw material and other supplies. Suppliers are not likely to jeopardize these sales by threatening the customer o Cost Leadership can also reduce the threat to buyers. Since cost leadership is based on large volumes of production, then the threat of buyers may be reduced, because buyers may depend on just a few firms for the goods or services they purchase

Likely to be rare sources of cost advantage o Learning-Curve economies of Scale o Differential low cost access to productive inputs o Technological software o

o o o o o

Less-Likely to be rare sources of cost advantage Economies of scale Diseconomies of scale Technological Software Policy Choices

Organizing to Implement Cost leadership o Organizing to realize the full potential of cost leadership strategies Organizational Structure: Functional Structure with, Few layers in the reporting structure Simple reporting relationships Small corporate staff Focus on narrow range of business functions Management Control Systems: Tight cost control systems Quantitative cost goals Close supervision of labor, raw material, inventory, and other costs A cost leadership philosophy