Chapter 4:

Business-Level Strategy

5-1
Core Competencies, Strategy and Business-level
Strategy

The resources and capabilities that have

Core been determined to be a source of
competencies competitive advantage for a firm over its
rivals

An integrated and coordinated set of

Strategy actions taken to exploit core competencies
and gain a competitive advantage

Actions taken to provide value to customers

Business-level and gain a competitive advantage by
strategy exploiting core competencies in specific,
individual product markets
5-2
 Key Issues of Business-Level Strategy

• What good or service to offer customers

• How to manufacture or create the good or service
• How to distribute the good or service in the
marketplace

5-3
Customers: Relationship to Business-Level
Strategy

Who will be
served?

Key Issues
in What needs will
Business-level be satisfied?
Strategy

How will those

needs be satisfied?

5-4
Who: Determining the Customers to Serve
• Market segmentation
– A process used to cluster people with similar needs
into individual and identifiable groups.

All Customers
Consumer Industrial
Markets Markets

5-5
What: Determining Which Customer Needs to Satisfy

• Customer needs are related to a product’s

benefits and features.
• A firm’s ability to meet customer needs
creates VALUE for the customer.
• Two forms of value:
– Low cost
– Unique, or differentiated product

5-6
How: Determining Core Competencies
Necessary to Satisfy Customer Needs

• Firms use core competencies to implement

value-creating strategies that satisfy
customers’ needs.
• Only firms with capacity to continuously
improve, innovate and upgrade their
competencies can expect to meet and/or
exceed customer expectations across time.

5-7
Types of Business-level
Strategies

5-8
 The Purpose of a Business-Level Strategy

• Business-Level Strategies
– Are intended to create differences between the
firm’s position relative to those of its rivals.
• To position itself, the firm must decide
whether it intends to:
– Perform activities differently or
– Perform different activities as compared to its
rivals.

5-9
Two Choices for Business Level Strategy

• Types of potential competitive advantage

– Achieving lower overall costs than rivals
– Possessing the capability to differentiate the firm’s
product or service and command a premium price

• Types of competitive scope

– Broad scope
– Narrow scope

5-10
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Differentiation

Cost Differen-
Broad
Leadership tiation
Target
Market
Integrated Cost
Breadth of
Leadership/
Competitive Differentiation
Scope
Narrow
Target Focused Cost Focused
Market Leadership Differentiation

5-11
 Generic Business Level Strategies

Source of Competitive Advantage

Cost Differentiation

Broad Cost
Target Leadership
Market
Breadth of
Competitive
Scope
Narrow
Target
Market

5-12
 Cost Leadership Strategy

An integrated set of actions designed to produce or

deliver goods or services at the lowest cost, relative to
competitors with features that are acceptable to
customers
– relatively standardized products
– features acceptable to many customers
– lowest competitive price

5-13
 How to Obtain a Cost Advantage
Determine and Reconfigure, if
control needed

Cost Drivers Value Chain

• Alter production process • New raw material

• Change in automation
• New distribution channel
• New advertising media
• Direct sales in place of
indirect sales
• Forward integration
• Backward integration
• Change location
relative to suppliers or
buyers
5-14
 Cost Leadership Value Chain
Firm Infrastructure
Activities
Support

Human Resource Management

Technological Development
Procurement

Service
Operations

Outbound
Marketing
Logistics

Logistics
Inbound

& Sales

Primary Activities

5-15
Cost Leadership Value Chain
Inbound
Logistics
Simplified Planning Relatively Few
Cost Effective
MIS Systems
Activities Firm Infrastructure
Practices to Reduce
Planning Costs
Management Layers
to Reduce Overhead
Activities

Support
Support

HighlyEffective
efficient
Training Programs to
Human Resource
Consistent Pol.
to Reduce
systems
Management
Improve Worker
to link
Effectiveness
Efficiency and
Turnover Costs
Easy-to-Use Manufacturing
Technological
Technologies suppliers’
Developmentprod.s
Investments in Technology in order
to Reduce Costs Associated with
with the
Systems and Procedures to find
firm’s
Manufacturing Processes
Frequent Evaluation Processes
Procurement
the Lowest Cost Products
Purchase Raw Materials
to production
Operations to Monitor Suppliers’
Performances
processes

Outbound

Service
Highly Efficient Efficient Plant Delivery Small, Highly Effective Product

Logistics
Logistics

Systems to Link Scale to Minim- Schedule that Trained SalesInstallations to

Marketing
Logistics
Inbound

Suppliers’ Prod-
Inbound

& Sales
ize Manufactur- Reduces Costs Force Reduce
ucts with the ing Costs Frequency and
Firm’s Produc- Selection of Low Products Priced Severity
tion Processes Timing of Asset Cost Transport to Generate Sales of Recalls
Purchases Carriers Volume

Located in Close Policy Choice of Efficient Order National

Proximity with Plant Tech. Sizes Scale
Suppliers Advertising
Organizational Interrelationships
Learning with Sister Units

Primary Activities

5-16
 Cost Leadership Value Chain
Operations
Relatively Few
Cost Effective Simplified Planning Practices
Management Layers
MIS Systems
Activities Economies of
to Reduce Planning Costs
to Reduce Overhead
Activities

Support
Support

Consistent Policies to scale to reduce

Effective Training
Human
Reduce TurnoverResource
Costs Management
Programs to Improve
production
Worker Efficiency and costs
Easy-to-Use Manufacturing Effectivenessin Technology in
Investments
Technological Development
Technologies order to Reduce Costs
Construction of
Associated with Manufacturing
Processes
Systems and Procedures to find the Lowest
Procurementefficient-scale
Frequent Evaluation Processes
Cost Products to Purchase Raw Materials
to Monitor Suppliers’

Service
Operations
production
Performances

Outbound
Highly Efficient Efficient Plant Delivery Small, Highly Effective Product

Logistics
Operations
Logistics
Logistics

Systems to Link Scale to Schedule that

facilities
Trained Sales Installations to
Inbound

Inbound

Suppliers’ Prod- Minimize Reduces Costs Force Reduce

ucts with the Manufacturing Selection of Low Products Priced Frequency and
Firm’s Produc- Costs
Timing of Asset Cost Transport to Generate Sales Severity
tion Processes Purchases Carriers Volume of Recalls

Located in Close Policy Choice of Efficient Order National

Proximity with Plant Technology Sizes Scale
Suppliers Advertising
Organizational
Learning

Primary Activities

5-17
 Cost Leadership Value Outbound
Chain
Logistics
Simplified Planning Relatively Few
MIS Systems Firm Infrastructure
Cost Effective
Practices to Reduce
Planning Costs
Delivery
Management Layers
to Reduce Overhead
Activities
schedule that
Activities

Support
Support

Effective Training Programs to

Human
Reduce TurnoverResource
Consistent Policies to
Costs Management
Improve reduces costs
Worker Efficiency and
Effectiveness
Easy-to-Use Manufacturing Selection of low
Investments in Technology in order
Technological
Technologies Developmentcost transport
to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to Frequent carriers
Frequent Evaluation
Evaluation Processes
Processes
Procurement
find the Lowest Cost Products to
to Monitor
Monitor Suppliers’
Suppliers’

Service
to Purchase Raw Materials

Service
Performances
Performances Efficient

Outbound
Highly Efficient Efficient Plant Delivery Small, Highly Effective Product
Operations
order sizes

Logistics
Outbound

Marketing
Systems to Link Scale to Minim- Schedule that Trained Sales Installations to
Logistics

Logistics
Inbound

& Sales
Suppliers’ Prod- ize Manufactur- Reduces Costs Force Reduce
ucts with the ing Costs Frequency and
Selection of Low Products Priced
Firm’s Produc- Timing of Asset Severity
Cost Transport to Generate Sales
tion Processes Purchases of Recalls
Carriers Volume
Located in Close Policy Choice of Efficient Order National
Proximity with Plant Tech. Sizes Scale
Suppliers Advertising
Organizational Interrelationships
Learning with Sister Units
Primary Activities

5-18
 Marketing
Cost Leadership Value Chain
Simplified Planning Relatively Few
& Sales
Cost Effective
MIS Systems
Activities Firm Infrastructure
Practices to Reduce Management Layers
Planning Costs to Reduce Overhead Small, highly
Activities

Support
Support

Consistent Pol. to Reduce Effective Training Programs to trained sales

Human Resource Management
Turnover Costs
Easy-to-Use Manufacturing
Technological Development
Technologies
Systems and Procedures to find
Procurement
the Lowest Cost Products to
Improve Worker Efficiency and
Effectiveness force
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes Products priced
Frequent Evaluation Processes to to generate
Monitor Suppliers’ Performances

Service
Purchase Raw Materials sales volume

Service
Outbound
Highly Efficient Efficient Plant Delivery Small, Highly
Effective Product

Marketing
Logistics
Operations

Marketing
Logistics

Systems to Link Scale to Minim- Schedule that Trained Sales

Installations to

Sales
Inbound

&&Sales
Suppliers’ Prod- ize Manufactur- Reduces Costs Force Reduce
ucts with the ing Costs Selection of Low Products Priced Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
tion Processes Purchases Carriers Volume of Recalls

Located in Close Policy Choice of Efficient Order National

Proximity with Plant Tech. Sizes Scale
Suppliers Advertising
Organizational Interrelationships
Learning with Sister Units

Primary Activities

5-19
 Cost Leadership Value Chain
Cost Effective
Simplified Planning

Firm Infrastructure
Practices to Reduce
Relatively Few
Management Layers Service
MIS Systems Planning Costs Effective product
to Reduce Overhead
Activities
Activities

Support
Support

Effective Training Programs to Improve

Consistent Pol. to
Human
Reduce TurnoverResource
Costs Management
Worker installations to
Efficiency and Effectiveness

Investments
Technological Development
Easy-to-Use Manufacturing
Technologies
Costs Associated with Manufacturing
Systems and Procedures to find
Procurement
the Lowest Cost Products to
in
reduce
Technology in order to Reduce
recalls Processes
Frequent Evaluation Processes to
Monitor Suppliers’ Performances

Service
Service
Purchase Raw Materials
Operations
Highly Efficient Efficient Plant Delivery Small, Highly
Effective Product
Service
Outbound

Marketing
Logistics

Systems to Link Scale to Minim- Schedule that Trained Sales

Installations to

Logistics
Inbound

& Sales
Suppliers’ Prod- ize Manufactur- Reduces Costs Force Reduce
ucts with the ing Costs Selection of Low Products Priced Frequency and
Firm’s Produc- Severity
Timing of Asset Cost Transport to Generate Sales
tion Processes Carriers Volume of Recalls
Purchases
Located in Close Policy Choice of Efficient Order National
Proximity with Plant Tech. Sizes Scale
Suppliers Advertising
Organizational Interrelationships
Learning with Sister Units
Primary Activities

5-20
 Cost Leadership Value Chain
Simplified Planning Relatively Few
Cost Effective
MIS Systems
Activities Firm Infrastructure
Practices to Reduce
Planning Costs
Management Layers
to Reduce Overhead
Activities

Support
Support

Consistent Pol. to Effective Training Programs to Improve

Human Resource Management
Reduce Turnover Costs Worker Efficiency and Effectiveness

Easy-to-Use Manufacturing Investments in Technology in order

Technological Development
Technologies to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to find Frequent Evaluation Processes
Procurement
Procurement
Procurement to Monitor Suppliers’

Service
the Lowest Cost Products to
Operations
Operations

Service
Outbound
Outbound
Purchase Raw Materials Performances

Logistics
Logistics
Highly Efficient Efficient Plant Delivery Small, Highly Effective Product

Marketing

Marketing
Logistics

Logistics
Systems to Link Scale to Minim- Schedule that Trained Sales Installations to
Inbound

Inbound

& Sales

& Sales
Suppliers’ Prod- ize Manufactur- Reduces Costs Force Reduce
ucts with the ing Costs
Procurement
Selection of Low Products Priced Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
tion Processes Purchases Carriers Volume of Recalls
Systems and procedures to Frequent evaluation
Located in Close Policy Choice of Efficient Order National
find thewith
Proximity
Suppliers
lowest cost products
Plant Tech. Sizes processes to monitor
Scale
Advertising
to purchaseOrganizational
raw materials Interrelationships suppliers’ performances
Learning with Sister Units

Primary Activities

5-21
 Cost Leadership Value Chain
Simplified Planning Relatively Few
Cost Effective
MIS Systems Firm Infrastructure
Practices to Reduce
Planning Costs
Management Layers
to Reduce Overhead
Activities

Activities
Support

Support

Consistent Pol. to Reduce Effective Training Programs to

Human Resource Management
Turnover Costs
Easy-to-Use Manufacturing
Technological
Technologies Development
Technological Development
Systems and Procedures to find
Procurement
the Lowest Cost Products to
Improve Worker Efficiency and
Effectiveness
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes
Frequent Evaluation Processes
to Monitor Suppliers’

Service
Service
Operations
Purchase Raw Materials Performances

Outbound
Highly Efficient Efficient Plant Delivery Small, Highly Effective Product

Logistics
Technological Development

Marketing
Logistics

Systems to Link Scale to Minim- Schedule that Trained Sales Installations to

Inbound

& Sales
Suppliers’ Prod- ize Manufactur- Reduces Costs Force Reduce
Easy-to-Use
ucts with the ing Costs Selection of Investments in technology in
Low Products Priced Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
manufacturing
tion Processes Purchases Carriers order to reduce costs associated
Volume of Recalls
technologies
Located in Close Policy Choice of with
Efficient Ordermanufacturing
National processes
Proximity with Plant Tech. Sizes Scale
Suppliers Advertising
Organizational Interrelationships
Learning with Sister Units
Primary Activities

5-22
 Cost Leadership Value Chain
Simplified Planning Relatively Few
Cost Effective
Firm Infrastructure
MIS Systems
Activities
Activities Practices to Reduce
Planning Costs
Management Layers
to Reduce Overhead
Activities

Support
Support
Support

Effective Training Programs to

Human Resource
Resource Management
Consistent Pol.
Human
to Reduce
Management Improve Worker Efficiency and
Turnover Costs Effectiveness
Easy-to-Use Manufacturing Investments in Technology in order
Technological
Technological Development
Technologies Development to Reduce Costs Associated with
Manufacturing Processes

HumanProcurement
Resource Management
Systems and Procedures to find
Procurement
the Lowest Cost Products to
Operations Frequent Evaluation Processes
to Monitor Suppliers’

Service
Consistent policies to
Purchase Raw Materials
Intense & effective training
Performances

Outbound
Highly Efficient Efficient Plant Delivery Small, Highly Effective Product

Logistics

Marketing
Logistics

reduce turnover costs programs to improve worker

Systems to Link Scale to Minim- Schedule that Trained Sales Installations to
Inbound

& Sales
Suppliers’ Prod- ize Manufactur- Reduces Costs Force Reduce
ucts with the ing Costs efficiency and effectiveness
Selection of Low Products Priced Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
tion Processes Purchases Carriers Volume of Recalls

Located in Close Policy Choice of Efficient Order National

Proximity with Plant Tech. Sizes Scale
Suppliers Advertising
Organizational Interrelationships
Learning with Sister Units
Primary Activities

5-23
 Cost Leadership Value Chain
Simplified Planning Relatively Few
MIS SystemsFirm
Firm Infrastructure
Cost Effective
Infrastructure
Practices to Reduce
Planning Costs
Management Layers
to Reduce Overhead
Activities

Activities
Support

Support

Consistent Pol. Effective Training Programs to

Human Resource Management
to Reduce Improve Worker Efficiency and
Effectiveness
Turnover Costs

Firm Infrastructure
Easy-to-Use Manufacturing
Technological
Technologies Development
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes
Cost effective Relatively few
Systems and Procedures to find Simplified planning
Frequent Evaluation Processes

MIS systems Procurement

the Lowest Cost Products to to Monitor Suppliers’
managerial layers to policies to reduce

Service
Purchase Raw Materials Performances

Outbound
Highly Efficient Efficient Plant Delivery Small, Highly Effective Product
reduce overhead costs planning costs

Logistics
Operations

Marketing
Logistics

Systems to Link Scale to Minim- Schedule that Trained Sales Installations to

Inbound

& Sales
Suppliers’ Prod- ize Manufactur- Reduces Costs Force Reduce
ucts with the ing Costs Selection of Low Products Priced Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
tion Processes Purchases Carriers Volume of Recalls

Located in Close Policy Choice of Efficient Order National

Proximity with Plant Tech. Sizes Scale
Suppliers Advertising
Organizational Interrelationships
Learning with Sister Units
Primary Activities

5-24
Cost Leadership Strategy: Competitors

Rivalry with
Existing Competitors • Due to cost leader’s
advantageous position rivals
Threat of hesitate to compete on
new
entrants
basis of price.
Rivalry
among Bargaining • Lack of price competition
power of
competing
firms suppliers leads to greater profits.

Threat of Bargaining
substitute power of
products buyers

5-25
 Cost Leadership Strategy: Buyers
Bargaining Power • Customers already value
of Buyers firm’s low-price position
• Can mitigate buyers’ power
Threat of by:
new
entrants – Driving prices far below
Rivalry
Bargaining
competitors, causing them to
among exit, thus shifting power with
competing power of
firms suppliers buyers back to the firm.

Threat of Bargaining
substitute power of
products buyers

5-26
 Cost Leadership Strategy: Suppliers
Bargaining Power • Can mitigate suppliers’
of Suppliers power by:
– Being able to absorb cost
Threat of
new
increases due to low cost
entrants position.
Rivalry
among Bargaining – Being able to make very large
power of
competing
suppliers purchases, reducing chance
firms
of supplier using power.
Threat of Bargaining
substitute power of
products buyers

5-27
Cost Leadership Strategy: New Entrants
The Threat of
• Can frighten off new
Potential Entrants
entrants due to:
Threat of
new
– Their need to enter on a
entrants large scale in order to be
Rivalry
among Bargaining cost competitive.
competing power of
firms suppliers
– The time it takes to
move down the learning
Threat of Bargaining
substitute power of curve.
products buyers

5-28
 Cost Leadership Strategy: Substitutes
Product • Cost leader is well
Substitutes positioned to lower
prices in order to
Threat of
new maintain value position.
entrants
Rivalry
among Bargaining • Need to be aware of
competing
firms
power of
suppliers disruptive technology or
other non-traditional
Threat of Bargaining substitutes.
substitute power of
products buyers

5-29
Major Risks of Cost Leadership Strategy

Dramatic technological change could take

away your cost advantage.
Competitors may learn how to imitate
Value Chain.

Focus on efficiency could cause Cost

Leader to overlook changes in customer
preferences.

5-30
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Differentiation

Broad Cost
Target
Differen-
Market Leadership tiation
Breadth of
Competitive
Scope
Narrow
Target
Market

5-31
 Differentiation strategy
“An integrated set of actions designed by a firm
to produce or deliver goods or services that
customers perceive as being different in ways
that are important to them.”

– Focus is on non-standardized products

– Appropriate when customers value
differentiated features more than they value
low cost.

5-32
 How to Obtain a Differentiation Advantage

Control if needed Reconfigure to

maximize

Cost Drivers Value Chain

• Lower buyers’ costs

• Raise performance of product or service
• Create sustainability through:
- customer perceptions of uniqueness
- customer reluctance to switch to non-unique product
5-33
 Inbound
Differentiation Value Chain
Compensation programs Logistics A companywide emph-
Firm Infrastructure
intended to encourage
worker creativity & prod.
Activities
Support asiis on producing high
Superior handling
quality products
Activities
Support

Highly Developed Information Extensive use of subjective Superior

of incoming
Human Resource raw
Management
Systems to better understand rather than objective personnel
customers’ purchasing preferences
performance measures training
materials to
Coordination among R&D, Investments in tech. that will allow Strong
minimize
Technological damage
Development
product development and the firm to consistently produce capability in
marketing basic research
and improve the
Systems and procedures used to
highly differentiated products
Purchase of highest quality
materials
Procurement
quality of the final
find the highest quality raw
Operations replacement parts
product

Service
Consistent Accurate and Strong Coordin- Complete field

Outbound
Logistics

ation among

Marketing
manufacturing responsive stocking of

Logistics
Inbound

& Sales
of attractive order functions in replacement
products processing R&D, Marketing parts
procedures and Product
Development
Rapid Extensive
responses to
customers Rapid and timely personal
product relationships
unique with buyers
manufacturing deliveries to Premium
specifications customers
Pricing

Primary Activities

5-34
 Differentiation Value Chain
Operations
Highly Developed Information
Consistent
Firm Infrastructure
Systems to better understand
customers’ purchasing preferences manufacturing of
Activities
Support

Compensation programs
attractive products
Human Resource Management
intended to encourage
worker creativity & prod.
Coordination among R&D, Strong
Rapid responses
Technological Development
product development and capability in
marketing basic research
to customers
Systems and procedures used to find
Procurementunique
the highest quality raw materials

Service
Operations
Accurate and manufacturing

Outbound
Superior Consistent Strong Coordin- Complete field
Operations

Logistics
Marketing
ation among
Logistics

handling of manufacturing responsive specifications stocking of

Inbound

& Sales
incoming raw of attractive order functions in replacement
materials to products processing R&D, Marketing parts
minimize procedures and Product
damage and Development
Rapid Extensive
improve the Rapid and timely
responses to personal
quality of the product
customers relationships
final product deliveries to
unique with buyers
manufacturing customers
Premium
specifications Pricing

Primary Activities

5-35
 Outbound
Differentiation Value Chain
Highly Developed Information Logistics
A companywide emph-

Firm Infrastructure
Systems to better understand asiis on producing high
customers’ purchasing preferences quality products
Activities Accurate and
Activities

Support

Compensation programs Extensive use of subjective Superior

responsive
Support

Human Resource Management

intended to encourage
worker creativity & prod.
rather than objective
performance measures
personnel
order
training
Coordination among R&D, Investments in tech. that will allow Strong
processing
Technological
product development and
marketing Development
the firm to consistently produce
highly differentiated products
capability in
procedures
basic research
Systems and procedures used to find the
Purchase of highest quality
Procurement
highest quality raw materials replacement parts Rapid and timely

Service
product deliveries

Outbound
Superior Consistent Accurate and Strong Coordin- Complete field
Operations

Outbound

Logistics
Marketing
ation among

Logistics
handling of manufacturing responsive stocking of
functions in to customers
Logistics

& Sales
incoming raw of attractive order replacement
Inbound

materials to products processing R&D, Marketing parts

minimize procedures and Product
damage and Development
Rapid Extensive
improve the Rapid and timely personal
responses to
quality of the product
customers relationships
final product deliveries to
unique with buyers
manufacturing customers Premium
specifications Pricing

Primary Activities

5-36
 Marketing
Differentiation Value Chain
Highly Developed Information
& Sales
A companywide emph-
Strong coordination
Firm Infrastructure
Systems to better understand asiis on producing high
customers’ purchasing preferences quality products among functions in
Activities
Support

Compensation programs Extensive use of subjective Superior

R&D, marketing &
Human Resource Management
intended to encourage
worker creativity & prod.
rather than objective
performance measures
personnel
training product development
Coordination among R&D, Investments in tech. that will allow Strong

Technological Development
product development and
marketing
the firm to consistently produce
highly differentiated products
Extensive personal
capability in
basic research
relationships with
Systems and procedures used to find Purchase of highest quality
Procurement
the highest quality raw materials replacement parts buyers

Service
Outbound
Superior Consistent Accurate and Strong Coordin- Premium
Complete field
Operations

Logistics
Marketing
Marketing
Logistics

handling of manufacturing responsive ation among stocking of

pricing
Inbound

& Sales
& Sales
incoming raw of attractive order functions in replacement
materials to products processing R&D, Marketing parts
minimize procedures and Product
damage and Development
Rapid Extensive
improve the Rapid and timely
responses to personal
quality of the product
customers relationships
final product deliveries to
unique with buyers
customers
manufacturing Premium
specifications Pricing

Primary Activities

5-37
 Differentiation Value Chain
Highly Developed Information
Firm Infrastructure
Systems to better understand
customers’ purchasing preferences
A companywide emph-
asiis on producing high
quality products
Service
Activities

Activities
Complete field
Support

Support
Compensation programs Extensive use of subjective Superior

Human Resource Management

intended to encourage
worker creativity & prod.
rather than objective
stocking of
performance measures
personnel
training
replacement
Coordination among R&D, Investments in tech. that will allow
Strong
the firm to consistently produce
Technological Development
marketing
parts
product development and
highly differentiated products
capability in
basic research
Systems and procedures used to find Purchase of highest quality
Procurement
the highest quality raw materials replacement parts

Service
Outbound
Strong Coordin-
Operations
Superior Consistent Accurate and Complete field

Logistics
ation among

Marketing
Logistics

handling of manufacturing responsive stocking of

Inbound

& Sales
incoming raw of attractive order functions in replacement
materials to products processing R&D, Marketing parts
minimize procedures and Product
damage and Development
Rapid Rapid and Extensive
improve the responses to timely product personal
quality of the customers deliveries to relationships
final product unique customers with buyers
manufacturing Premium
specifications Pricing

Primary Activities

5-38
 Differentiation Value Chain
Highly Developed Information A companywide emph-
Firm Infrastructure
Systems to better understand asiis on producing high
Activities

customers’ purchasing preferences quality products

Support

Activities
Support

Compensation programs Extensive use of subjective Superior

Human Resource Management

intended to encourage
worker creativity & prod.
rather than objective
performance measures
personnel
training
Coordination among R&D, Investments in tech. that will allow Strong

Technological Development
product development and
marketing
the firm to consistently produce
highly differentiated products
capability in
basic research
Systems and procedures used to
Procurement
Procurement
find the highest quality raw
Operations Purchase of highest quality
replacement parts

Service
materials

Outbound
Strong Coordin- Complete field

Logistics
Superior Consistent Accurate and

Marketing
Logistics

handling of manufacturing responsive ation among stocking of

Inbound

& Sales
incoming raw of attractive order functions in replacement
materials to products processing R&D, Marketing parts
minimize Procurement procedures and Product
Development
Systems & procedures
damage and
improve the
Rapid Purchase of highest
Rapid and timely
Extensive
Located in
responses to personal
used to find the highest
quality of the customers product
quality replacement relationships Close Proximity
final product deliveries to
quality raw materials unique
manufacturing parts
customers
with buyers
Premium with Suppliers
specifications Pricing

Primary Activities

5-39
 Differentiation Value Chain
Highly Developed Information A companywide emphasis
Firm Infrastructure
Systems to better understand on producing high quality
customers’ purchasing preferences products
Activities

Activities
Support

Support

Compensation programs Extensive use of subjective Superior

Human Resource Management
intended to encourage
worker creativity & prod.
rather than objective
performance measures
personnel
training
Coordination among R&D, Investments in tech. that will allow Strong
Technological
marketing
Development
Technological Development
product development and the firm to consistently produce
highly differentiated products
capability in
basic research
Systems and procedures used to Purchase of highest quality
Procurement
find the highest quality raw
Operations replacement parts

Service
materials

Outbound
Logistics
Superior Consistent Accurate and Strong Coordin- Complete field

Marketing
Logistics

handling of
Technological Development
manufacturing responsive ation among stocking of
Inbound

& Sales
incoming raw of attractive order functions in replacement
materials to products processing R&D, Marketing parts
Coordination among
minimize Investments in technol-
procedures and Product Strong
damage and Development
R&D, marketing and
improve the
Rapid ogies to produce highly
Rapid and timely
Extensive capability in
responses to personal
product development
quality of the customers differentiated products
product relationships basic research
final product unique deliveries to with buyers
manufacturing customers Premium
specifications Pricing

Primary Activities

5-40
 Differentiation Value Chain
Highly Developed Information A companywide emph-
Firm Infrastructure
Systems to better understand asiis on producing high
Activities

customers’ purchasing preferences quality products

Activities
Support

Support
Activities
Support

Compensation programs Extensive use of subjective Superior

Human Resource
Human Resource Management
Management
intended to encourage
worker creativity & prod.
rather than objective
performance measures
personnel
training
Coordination among R&D, Investments in tech. that will allow Strong
Technological Development
product development and
marketing
the firm to consistently produce
highly differentiated products
capability in
basic research

Human Procurement
Resource Management
Systems and procedures used to
find the highest quality raw
Purchase of highest quality
replacement parts

Service
materials

Outbound
Compensation programs Extensive use of
Strong Coordin- Superior
Operations

Logistics
Superior Consistent Accurate and ation among Complete field

Marketing
Logistics

which encourage worker

handling of manufacturing responsivesubjective perform-
functions in stocking ofpersonnel
Inbound

& Sales
incoming raw of attractive order R&D, Marketing replacement
creativity & productivity
materials to products ance measures
processing and Product parts training
minimize procedures Development
damage and Rapid Extensive
improve the responses to Rapid and timely personal
quality of the customers product relationships
final product unique deliveries to with buyers
manufacturing customers Premium
specifications Pricing

Primary Activities

5-41
 Differentiation Value Chain
Highly Developed Information A companywide emph-
FirmInfrastructure
Firm Infrastructure
Systems to better understand asiis on producing high
Activities

customers’ purchasing preferences quality products

Activities
Activities
Support

Support
Support

Compensation programs Extensive use of subjective Superior

Human Resource Management
intended to encourage
worker creativity & prod.
rather than objective
performance measures
personnel
training

Firm Infrastructure
Coordination among R&D,
Technological Development
product development and
marketing
Investments in tech. that will allow Strong
the firm to consistently produce
highly differentiated products
capability in
basic research
Highly developed info. systems to
Systems and procedures used to A company-wide emphasis
Purchase of highest quality
Procurement
better understand customers’
find the highest quality raw on producing high quality
replacement parts

Service
materials
Operations
purchasing preferences
Superior Consistent Accurate and products
Strong Coordin- Complete field

Outbound
Marketing
Logistics

Logistics
handling of manufacturing responsive ation among stocking of
Inbound

& Sales
incoming raw of attractive order functions in replacement
materials to products processing R&D, Marketing parts
minimize procedures and Product
damage and Development
Rapid Premium
improve the responses to Rapid and timely
Pricing
quality of the customers product
deliveries to Extensive
final product unique
customers personal
manufacturing relationships
specifications with buyers

Primary Activities

5-42
 Differentiation Value Chain

SOURCE: Adapted with the permission

of The Free Press, an imprint of Simon &
Schuster Adult Publishing Group, from
Competitive Advantage: Creating and
Sustaining Superior Performance, by
Michael E. Porter, 47. Copyright © 1985,
1998 by Michael E. Porter.

5-43
Differentiation Strategy: Competitors

Rivalry with
Defends against competitors
Competitors
because brand loyalty to
differentiated product
Threat of
new offsets price competition.
entrants
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

5-44
 Differentiation Strategy: Buyers
Bargaining Power
Can mitigate buyers’ power
of Buyers
because well differentiated
products reduce customer
Threat of
new sensitivity to price increases.
entrants
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

5-45
 Differentiation Strategy: Suppliers
Bargaining Power • Can mitigate suppliers’
of Suppliers power by:
– Absorbing price increases due
Threat of
new to higher margins.
entrants
Rivalry – Passing along higher supplier
Bargaining
among
power of prices because buyers are
competing
firms suppliers loyal to differentiated brand.

Threat of Bargaining
substitute power of
products buyers

5-46
Differentiation Strategy: New Entrants

The Threat of • Can defend against new

Potential Entrants entrants because:
– Customer loyalty is difficult to
Threat of
new disrupt.
entrants
Rivalry – New products must be at least
Bargaining
among
power of equal to performance of
competing
firms suppliers proven products, but offered
at lower prices.
Threat of Bargaining
substitute power of
products buyers

5-47
 Differentiation Strategy: Substitutes
Product
Well positioned relative to
Substitutes
substitutes because brand
loyalty to a differentiated
Threat of
new product tends to reduce
entrants
Rivalry
customers’ testing of new
Bargaining
among
power of
products or switching
competing
firms suppliers brands.
Threat of Bargaining
substitute power of
products buyers

5-48
Major Risks of a Differentiation Strategy

Customers may decide that the price

differentiation between the
differentiator’s product and the cost
leaders price is too large.

A firm’s means of differentiation may

cease to provide value for which
customers are willing to pay.
The means of uniqueness may no longer
be valued by customers.
5-49
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Differentiation

Broad
Target
Cost Differen-
Market Leadership tiation
Breadth of
Competitive
Scope Focused Focused
Narrow
Target
Cost Differen-
Market Leadership tiation

5-50
 Focus Strategies

Focus strategies are an integrated set of actions

designed to produce or deliver goods or
services that serve the needs of a particular
competitive segment.

5-51
 Focused Strategy
However...
Focused Opportunities may exist because:
Strategy involves  Firm may lack resources to
compete industry wide.
the same basic  Large firms may overlook small
approach as Broad niches.
Market Strategies.  The firm may be able to serve a
narrow market segment more
effectively than industry wide
competitors.
 Focus can allow you to direct
resources to certain value chain
activities to build competitive
advantage.

5-52
*
 Focused Strategy

• Types of focused strategies

– Focused cost leadership strategy
– Focused differentiation strategy
• Focused strategies are similar to
their counterparts in larger industry:
– Similar areas of emphasis from
analyzing the Value Chain
– Similar analysis of Porter’s Five Forces

5-53
Major Risks Involved With a Focused Strategy

Firm may be “out focused” by competitors.

Large competitor may set its sights on your

niche market.
Preferences of niche market may change to
match those of broad market.

5-54
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Differentiation

Broad
Target
Cost Differen-
Market Leadership tiation
Integrated Cost
Breadth of Leadership/
Competitive Differentiation
Scope Focused Focused
Narrow
Target
Cost Differen-
Market Leadership tiation

5-55
 Integrated Cost
Leadership/Differentiation Strategy

• Firms performing value chain activities in ways that

allow them to simultaneously pursue low cost and
differentiation.
• A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a
better position to:
– Adapt quickly to environmental changes.
– Learn new skills and technologies more quickly.

5-56
 Risks of Integrated Cost
Leadership/Differentiation Strategy

• Often involves compromises

– Becoming neither the lowest cost nor the most
differentiated firm.
• Becoming “stuck in the middle”
– Firm engages in economics such that it cannot
achieve benefit of premium pricing from
differentiation nor cost savings from cost
leadership.

5-57