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Chapter 6
1
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Business Strategy: Differentiation, Cost Leadership, and

Blue Oceans
ChapterCase: JetBlue: “Stuck in the Middle (Seat)”?

6.1 Business-Level Strategy: How to Compete for Advantage (LO 6-1)
CONNECT INTEGRATION
Interactive Labeling: Business-Level Strategy
6.2 Differentiation Strategy: Understanding Value Drivers (LO 6-2)
CONNECT INTEGRATION
Case Analysis: Toyota Value Drivers Case
6.3 Cost-Leadership Strategy: Understanding Cost Drivers (LO 6-3)
6.4 Business-Level Strategy and the Five Forces: Benefits and Risks (LO 6-4)
6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership (LO 6-5, LO 6-6)
CONNECT INTEGRATION
Interactive Labeling: Blue Ocean Strategy
6.6 Implications for the Strategist
Strategy Term Project
CONNECT INTEGRATION
HP Running Case: Module 6
myStrategy
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POWERPOINT SLIDES 1–5

This chapter begins the strategy formulation phase of the Analyze, Formulate, and Implement (AFI) framework. The chapter
takes a close look at business-level strategy and how to compete for advantage. Business-level strategy details the actions
managers take in their quest for competitive advantage when competing in a single product market. The chapter introduces
the generic business strategies and then dives into detail on differentiation and cost-leadership strategies. At the firm level,
performance is determined by value and cost positions relative to competitors. The chapter continues by integrating the five
forces model (from Chapter 3) with business-level strategies to assess the benefits and risks of each strategy as they vary with
industry conditions. Finally, the blue ocean strategy is discussed as a position combining both cost leadership and
differentiation.
Learning Objectives
LO 6-1 Define business-level strategy and describe how it determines a firm’s strategic position.
LO 6-2 Examine the relationship between value drivers and differentiation strategy.
LO 6-3 Examine the relationship between cost drivers and the cost-leadership strategy.
LO 6-4 Assess the benefits and risks of differentiation and cost-leadership strategies vis-à-vis the five
forces that shape competition.
LO 6-5 Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy.
LO 6-6 Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value
innovation.
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ChapterCase
CONSIDER THIS DISCUSSION QUESTIONS

Despite its initial success, why was JetBlue unable to sustain a blue ocean strategy?
Its value-added investments in equipment and services cost more to offer than the revenue that they generated. As the firm
grew they went from trying to straddle focused differentiation/focused cost leadership to a more challenging position of
trying to straddle broad differentiation/broad cost leadership.
JetBlue’s chief marketing officer, Marty St. George, was asked by The Wall Street Journal, “What is the biggest
marketing challenge JetBlue faces?” His response: “We are flying in a space where our competitors are moving
toward commoditization. We have taken a position that air travel is not a commodity but a services business. We want
to stand out, but it’s hard to break through to customers with that message.” Given St. George’s statement, which
strategic position is JetBlue trying to accomplish: differentiator, cost leader, or blue ocean strategy? Explain why.
With no other information than that statement, one would have to conclude that JetBlue is attempting a differentiation
strategy. However, their price positioning in the market, their communication to customers, and their recent actions (see next
question) all suggest that JetBlue is also trying to compete with the cost leaders. This mixed message is characteristic of a
“stuck in the middle” strategy.
Which strategic moves has the new CEO, Robin Hayes, put in place? Do these moves correspond to St. George’s
understanding of JetBlue’s strategic position? Why or why not? Explain.
Hayes’ decision to reduce legroom is counter to a differentiation strategy and the message communicated by the CMO. His
decision to raise fees for checked baggage runs counter to a strategy to compete effectively with Southwest, but is not too
dissimilar to ultra-low-cost airlines, like Ryanair or Spirit. It is also counter to customer service, as it means that customers
will lug their own baggage more often and there will be more competition for space in overhead bins.
Consider JetBlue’s value curve in Exhibit 6.10. Why is JetBlue experiencing a competitive advantage? What
recommendations would you offer to JetBlue to strengthen its strategic profile? Be specific.
To escape from its “stuck in the middle” position, JetBlue needs to move its curve either up or down. If it is going to try to
compete as a differentiator, as St. George suggests, then the highest priority areas for improvement are likely to be customer
service and reliability. If it wants to compete more effectively with the low-cost airlines, it needs to significantly pare back
costs, by reducing services and amenities. This would likely be the more radical of the two position changes.
6.1 Business-Level Strategy: How to Compete for

Advantage LO 6-1
STRATEGY SMART VIDEO LECTURE

POWERPOINT SLIDES 7 AND 71
This animated video in slide 71 describes each of the generic strategies. It can be assigned before class as preparation for
your lecture, it can be used to add interest to an online course, or it can be used as an opener for your lecture.
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EXAMPLE
Different generic strategies can lead to competitive advantage, even in the same industry. For example, Rolex and Timex
both compete in the market for wristwatches, yet they follow different business strategies. Rolex follows a differentiation
strategy: It creates a higher value for its watches by making higher-quality timepieces with unique features that last a lifetime
and that bestow a perception of prestige and status upon their owners. Customers are willing to pay a steep premium for these
attributes. Timex, in contrast, follows a cost-leadership strategy: It uses lower-cost inputs and efficiently produces a
wristwatch of acceptable quality, highlights reliability and accuracy, and prices its timepieces at the low end of the market.
The issue is not to compare Rolex and Timex directly—they compete in different market segments of the wristwatch
industry. Both can achieve a competitive advantage using diametrically opposed business strategies. This is because both
have a clear strategic profile. Rather, the idea is to compare Rolex’s strategic position with the next-best differentiator (e.g.,
Ebel), and Timex’s strategic position with the next-best, low-cost producer (e.g., Swatch). In the preceding example, Rolex
focuses on a small market segment: affluent consumers who want to present a certain image. Timex offers watches for many
different segments of the mass market.
The smartphone industry is a bimodal market with Apple as a clear differentiator at one end and Xiaomi and other Chinese
firms with clear cost-leadership positions. Other firms, like Samsung, are “stuck in the middle” and much less profitable as a
result (see “In smartphone market, it’s luxury or rock bottom” C Mims 2/2/15 The Wall Street Journal).
INTEGRATION
Interactive Labeling: Business-Level Strategy
This interactive drag-and-drop exercise covers the textbook examples of firms using a variety of generic business-level
strategies. The student will read the brief application case and move the firm name into the correct box provided. A
related quiz with questions follows the interactive activity. Difficulty: Medium Blooms: Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from this interactive by using small group exercise 2 at
the end of the chapter in the class or as a homework assignment. This exercise provides a list of firms the students can
place into one of the generic business-level strategies. Most students will know several firms well enough to place them
in a business-level strategy, or the student can research online for a more thorough analysis of firm strategies.
DISCUSSION TOPICS
POWERPOINT SLIDE 8
NEWER FACULTY: Use Exhibit 6.1 to pull together several topics touched on in previous chapters. Chapter 1 noted that
competitive advantage is based on the interdependence of firm and industry effects (on the left side of the figure). The blue
boxes at the top of the figure bring out industry elements discussed in Chapter 3. The brown boxes in the lower part of the
diagram are the primary subjects for this chapter. There are two fundamentally different business strategies: differentiation
and cost leadership. They are generic due to their wide application to disparate organizations. The scope of competition must
also be considered. The business can target a broad audience or a narrow or niche market. Strategic position is the profile
based on value creation and cost. Higher value tends to require higher cost, thus the need for trade-offs for businesses to
choose between a cost or value position. The generic strategies will build on the marketing courses the students have had
prior to this strategy course. The narrow and broad competitive scope complements well with selling into broad or niche
target markets.
Focused cost-leadership strategies often lead to products that appeal to a wide range of customers beyond the targeted
customer segment. If you create a low-cost structure for your firm and then use that position to market products designed to
meet the specific desires of a focused customer segment, plus the general desire to save money, you may find that the general
desire to save money attracts more customers from outside your target segment than from within it. This is a particular
problem when the non-target customers are viewed by the target customers as less prestigious or less attractive to imitate.
This is both a strategy problem and a marketing problem. Students will be able to relate to this problem when you pose it as
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products targeted to young, hip, college students that are priced to make them accessible. If too many senior citizens are
attracted to the products by the price, it can reduce the product’s appeal to the young, hip, target demographic. An example
might be a new restaurant near campus designed to have a very contemporary, young vibe and budget price. If this becomes
the new favorite place for older faculty to bring their children for dinner, can it still attract its target market? Carmakers have
experienced this problem also. They have designed, advertised, and positioned the Kia Soul, the Ford Fiesta, and the Fiat 500
to target millennials. However, in the first half of 2013, 42 percent of the buyers were nearer retirement age and only 12
percent were under 34. “Who’s buying ‘youth’ cars? Seniors” The Wall Street Journal 8/13/13. AACSB 2015 Standard 9
Integrating knowledge across fields
EXPERIENCED FACULTY: A few years ago we would have put Porsche in the focused differentiation category. In recent
years, however, they have moved to a broad differentiation strategy, by offering not just two-seater, convertible sports cars,
but a broad range of vehicles including sedans and SUVs to meet the needs of a wide variety of customer segments. This
strategic shift happens often to firms with a focus strategy when the firms have revenue growth aspirations beyond the
growth rate of their target customer segment. Porsche’s new strategy has increased market share, revenue, and profitability,
but it has caused a serious brand positioning problem. One of the primary value drivers supporting high customer
willingness-to-pay for Porsche products is its brand image as a sports carmaker. However, in 2012, four door sedans and
SUVs made up more than 75 percent of sales worldwide and 93 percent of sales in the important Chinese market. Continuing
in this direction may lose the ‘halo’ value of the sports car image, putting pressure on pricing across the entire product line.
You can use this issue to conduct a debate, with one group of students assigned to represent a long-term brand management
leader at the firm arguing the advantages of a strategic change back toward a strong emphasis on sports car sales and another
group of students arguing the advantages of continuing to emphasize the profitable sedans and SUVs from the perspective of
a younger manager who just joined the firm during the past three years. Then invite the class to weigh in on the discussion.
(See “Is Porsche still a sports car maker?” The Wall Street Journal 5/29/13. AACSB 2015 Standard 9 Integrating
knowledge across fields
END OF CHAPTER DISCUSSION QUESTION 1

What are some drawbacks and risks to a broad generic business strategy? To a focused strategy?
As the text notes, there is no single correct generic strategy for a specific industry. A drawback of a broad business strategy is
that the firm may be blinded to new entrants that enter the industry through a niche approach. Drawbacks to a more focused
approach could be that the niche you target will not grow or may decline; economic performance will have higher variability
for smaller segments than broader populations; and if economy of scale is important, it can be hard to be large enough to
compete with a focused strategy.
EXERCISES
POWERPOINT SLIDE 12
We have at times split the class into small groups and assigned each group a different consumer industry, and then asked each
group to identify firms in the industry and where they fit in the 2×2 rubric in Exhibit 6.2. The JCPenney Strategy Highlight
6.2 can be a starting point for analysis of the department store industry. Other industries the students are very familiar with
are restaurants, shoes, personal computers, and automobiles.
We find it helpful to remind the students of the strategic group discussion (in Chapter 3) as this tool identifies business
strategies that would be similar or different from one firm to the next. If used within a large industry, the results should yield
a list of firms that make up strategic groups and are direct competitors with each other within the groups. You could, for
example, ask students to analyze the airline industry. Make sure that they do not limit themselves to one firm in each box of
the rubric. Begin with the ChapterCase on JetBlue to start them off. After they have completed their analysis in small groups,
then pull up the strategic group map from Chapter 3 (Slide 54 or Exhibit 3.5) and invite students to compare/contrast their
output with the strategic groups map. AACSB 2015 Standard 9 Analytical thinking (be able to analyze and frame problems)
POWERPOINT SLIDE 12
EXPERIENCED FACULTY: In the following table, the columns show some optional advertising approaches used by companies
to communicate the value of their product in order to influence your buying decisions, and the rows list some familiar
product categories. For each product category, first consider how each type of advertising might influence you, then rank
from 1 (not at all) to 5 (strong influence) and enter that number in the cell. Most consumers use different criteria to make
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purchase decisions for different categories of product. Compare your rankings with those of other students in the class. What
approaches not included here have a stronger influence on your buying decisions? Second, for each advertising approach,
decide whether you think it would be more likely to be used for products sold by a company using a differentiation (D), cost-
leadership (CL), or integration (I) strategy and enter the letter abbreviation of that strategy under the column heading.
Compare your responses with those of other students and discuss why differentiators and cost leaders may choose similar or
different advertising approaches.
TV/Movie Celebrity Sustainability Social Point of Print Low Price
Product Endorsement Claims Media Purchase Media Assurance
Placement Comments Display Ads
Mobile
Devices
Casual
Clothing
Sporting
Goods
Airline
Ticket
Car
Food
Computer
This exercise would work best as a small group discussion that is later selectively shared with the full classroom. Ask each
student to complete the table before arriving in class. Then match their answers against those of other students in a group of 2
or 3. Ask them to draw on what they know about marketing to make a determination of the effectiveness (reach, richness,
relevance, and cost) of each type of communication for that industry. Richer media allow more information to be
communicated. Communication that is more narrowly targeted toward the customer is higher in relevance. Focus strategies
may be communicated more often using high relevance media. Differentiation strategies need richer media to communicate
information about products and services. Cost-leadership strategies need very low-cost media. AACSB 2015 Standard 9
END OF CHAPTER SMALL GROUP EXERCISE 2

POWERPOINT SLIDE 65
The table that follows includes a list of prominent firms. Select one of the five categories of generic business-level
strategies—broad cost leadership, focused cost leadership, broad differentiation, focused differentiation, and value
innovation—that you would apply to each firm. Add that strategy to the table, and explain your choices.
The list of firms is intended mostly to spark students to think about different types of industries and firms. Students should be
free to target an industry they know well and add more firms to the list. For example, in automobiles the list has Kia, Porsche,
Rolls-Royce, and Toyota. We want to expand the student’s thinking beyond Ford and GM as they consider firms in this
industry. The following is our placement of the listed firms into the Generic Business strategy grid, with a few firms using
value innovation strategy.
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Ann Taylor Broad Differentiation C.F. Martin & Co. Narrow Differentiation
BIC Narrow Cost Leadership McKinsey & Co. Narrow Differentiation
Big Lots Broad Cost Leadership Netflix Broad Differentiation
Black & Decker Broad Cost Leadership Nike Broad Differentiation
Clif Bar Narrow Differentiation Patek Philippe Narrow Differentiation
Coca-Cola Broad Differentiation Porsche Broad Differentiation
Dollar stores Broad Cost Leadership Rhapsody Narrow Cost Leadership
Ferrari Narrow Differentiation Rolls-Royce Narrow Differentiation
Google Broad Differentiation Ryanair Narrow Cost Leadership
Goya Foods Narrow Differentiation Samuel Adams Narrow Differentiation
Greyhound Lines Narrow Cost Leadership Singapore Airlines Broad Differentiation
Hyundai Broad Cost Leadership Target Value Innovation
Kia Motors Broad Cost Leadership Toyota Value Innovation
Land’s End Broad Differentiation Vanguard Group Narrow Cost Leadership
Liberty Mutual Broad Differentiation Victoria’s Secret Narrow Differentiation
LVMH Narrow Differentiation Zara Value Innovation
What are some common features of the firms you have placed within each category?
Students should address the target market segments the businesses have as customers for a broad or narrow portion of the
population. Then, they should consider some basic financial priorities of the firm. For example, Nike and Coca-Cola both
expend a large amount of their investments on advertisements; while other differentiators have large R&D budgets. These are
key activities for a differentiator that a cost leader, such as a dollar store or Greyhound would not undertake. Cost-leadership
firms, such as Big Lots, are likely to be more focused on supply chain management, than a differentiator, like Ferrari.
AACSB 2015 Standard 9 Analytical thinking (be able to analyze and frame problems)
6.2 Differentiation Strategy: Understanding Value

Drivers LO 6-2

In this video in slide 70 Michael Porter describes the differentiation generic strategy. It can be assigned before class as
preparation for your lecture or it can replace your lecture on this aspect of business-level strategy in an online course.
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EXAMPLES
POWERPOINT SLIDE 15
NEWER FACULTY: Differentiation strategy will add unique or otherwise rare features to increase the value as viewed by the
customers. This value in turn will drive a higher price for the product or service. Alternatively, differentiators excel at
customer service. Managers must be able to identify unmet customer needs and find ways to satisfy them or exceed customer
expectations. Firm C in Exhibit 6.3 is typically the case, as driving higher value will often increase cost. As long as the value
gap is increased (value increases MORE than cost), the differentiation will benefit the firm.
POWERPOINT SLIDE 18
In 1989, Lexus needed a perfect launch of its new line of luxury vehicles to stand a chance against the strong competitors in
the market. Yet its LS400 line required a recall a little more than a year after launch. Lexus’s initial quality problems could
have spelled an early doom for the new brand, whose slogan is “The Relentless Pursuit of Perfection.” To address this serious
threat, Lexus called each owner individually and advised bringing the car in for the recommended repair. When owners
picked up their cars after the repair, they found their Lexus had been detailed and the gas tank filled. If owners lived far from
a Lexus dealership, the company flew mechanics to the customer’s location. In less than three weeks, Lexus was able to
resolve the recall problems on all its 8,000 LS400 vehicles sold in the United States. By exceeding customer expectations,
Lexus managers turned a serious threat into an opportunity and established the brand’s reputation for superior customer
service. Only two years after its launch, Lexus was ranked first on vehicle quality and customer satisfaction by J.D. Power
and Associates, a leading information-services firm. In the same year (1991), Lexus became the top-selling luxury brand in
the United States.
INTEGRATION
Case Analysis: Toyota Value Drivers Case

This case analysis explores Toyota customer service from early successes with the Lexus to more recent problems the
firm has had. The activity reinforces the value drivers discussed in the textbook. Students will read the case and then
answer the four questions following it. Difficulty: Medium Blooms: Evaluate AACSB: Analytic
Follow-Up Activity: The instructor can build on these concepts by having the class or small groups develop examples of
firms using the other two value drivers (product features and complements). Examples can be successful or failed
attempts of firms building competitive advantage with these levers.
POWERPOINT SLIDE 18
The hotel industry provides a second example of superior customer service. Following its mission, “We are Ladies and
Gentlemen serving Ladies and Gentlemen,” the Ritz-Carlton has become one of the world’s leaders in providing a
personalized customer experience based on sophisticated analysis of data gathered about each guest, including past choices. It
offers personalized customer service that few hotel chains can match.
POWERPOINT SLIDE 17
The luxury carmaker BMW follows a differentiation strategy. It has a strong reputation for superior engineering, built
through decades of continued R&D investments. As a result, a BMW M3, a sports coupé, comes with many more
performance features than regular sedans. The high-performance capabilities of an M3 also come with a premium price.
POWERPOINT SLIDE 17
GoPro has a focused differentiation strategy. It sells cameras for sports enthusiasts that are continually innovated to be
smaller and more effective for its target market use.
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POWERPOINT SLIDE 17
Nestlé’s Nespresso single-serve coffee pods offer an example that links generic strategies from this chapter and business
models from Chapter 5. The firm differentiates using the value drivers of brand and quality. It believes that the quality of its
coffee is superior to that of the coffee available from other firms to fit its machines. It also believes its business model of only
selling direct to customers creates intimate knowledge of the customer that ultimately improves customer service. Others
might argue that its business model is a negative value driver because it does not provide the customer with the immediacy
and convenience of buying coffee at the grocery store or other “one stop shop.” (See an interview with Jean-Marc Duvoisin,
CEO Nestlé Nespresso, “Nespresso’s single serve plan focuses on China, U.S.” The Wall Street Journal 5/21/13.) Invite
discussion on the pros and cons of Nestlé’s differentiation position (versus cost leadership) and direct to consumer business
model (versus retail distribution). In what ways does the unique distribution business model support the differentiation
strategy? Ask marketing students to analyze Nespresso’s strategy in terms of the 4P framework. AACSB 2015 Standard 9
EXTENDED DISCUSSION
Many students know of Whole Foods and some have shopped in their stores. The idea that they use differentiation should be
pretty easy for the students to understand. Most will comment that the prices are higher at Whole Foods than a typical
grocer (like Kroger or Safeway), but the quality of the food is also considered to be better. One of the ways we like to bring
up the subject of the need for Whole Foods to change is to talk about the organic food market today versus when Whole
Foods opened in 1980. “When Walmart is a major retailer for organic foods, you can’t really call that a differentiator today,
can you?” Whole Foods WAS organic foods when they started and they had the large-scale market mostly to themselves
competing chiefly against local food co-ops and small specialized food outlets, but this is clearly not the case in 2015, when
Walmart and traditional grocers have large organic food sections. The Wall Street Journal 2/14/13 video discusses Whole
Foods’ challenge in adjusting their strategy to cope with increased competition in organic foods.
What value drivers are Whole Foods using to remain differentiated in the face of Walmart and other competitors
now selling organic foods? Whole Foods is refocusing on healthy eating by introducing educational elements into its
stores. Cooking classes, wellness clubs, and other special demonstrations are being created to provide additional
information to Whole Foods customers. This customization of the retail space is likely to be viewed positively by the store’s
clientele, but it also takes time and money to create and hold the events. Will the extra costs result in extra sales?
They are also building on a growing movement to fight childhood obesity by putting salad bars in schools. Whole Foods is
creating a good customer experience by treating employees well (and being on the “best companies to work for” list every
year). This creates improved customer service experiences.
STRATEGY SMART VIDEO EXAMPLE

POWERPOINT SLIDE 72
In the brief video in this slide a blogger offers ideas on how to find deals and good value in Whole Foods. It can be used to
introduce the following discussion question.
Whole Foods is trimming its cost structure. Does the firm risk being “stuck in the middle”? Why or why not? While
this is a possibility, it seems that the focus for Whole Foods is still squarely on differentiation. They are just trying to be
smarter in how they manage the cost side of the business. Expanding into private labels, for example, doesn’t mean those
private brands will be competing price-wise with traditional grocers. It seems to mean they are giving their customers some
additional choices. Whole Foods will have to keep a check on their “value gap” (V-C) to be sure they are not drifting into a
“stuck in the middle” situation.
What other methods could Whole Foods use to successfully drive its business strategy? Students may come up with a
wide variety of creative ideas with this question. The key point is that the answers are grounded in discussions of value,
cost, and scope of competition. For example, students could say Whole Foods should move into a membership model
similar to Costco with an eye toward supplying fresh foods to schools and large employer cafeterias. This increases the
economy of scope by adding another outlet for food products. It may be considered an innovative way to get more healthy
food out to large institutional customers that provide meals to kids or employees while at the same time building a revenue
stream rather than just donating salad bar equipment to schools. AACSB 2015 Standard 9 Application of knowledge and
Framing problems and developing creative solutions
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Research Update
Kehoe, R. R. and Tzabbar, D. (2015), Lighting the way or stealing the shine? An examination of the duality in star
scientists’ effects on firm innovative performance. Strat. Mgmt. J., 36: 709–727. doi: 10.1002/smj.2240
EXPERIENCED FACULTY: This research looks at the role that star scientists have in both a firm’s innovation productivity and
in providing leadership to non-star scientists. It offers a springboard for a discussion linking Chapter 4 and Chapter 6 with
a discussion of the demand for firms with a differentiation strategy to compete for talent as much as they compete for
sales.
6.3 Cost-Leadership Strategy: Understanding Value

Drivers LO 6-3

In this video in slide 69 Michael Porter describes the cost leaders generic strategy. It can be assigned before class as
preparation for your lecture or it can replace your lecture on this aspect of business-level strategy in an online course.
EXAMPLES
POWERPOINT SLIDE 25
The South African company De Beers has long held a very strong position in the market for diamonds because it tightly
controls the supply of raw materials. The aluminum producer Alcoa has access to lower-cost bauxite mines in the United
States, which supply a key ingredient for aluminum. GE, through its GE Capital division, has a lower cost of capital than
other industrial conglomerates such as Siemens, Philips, or ABB.
POWERPOINT SLIDE 26
NEWER FACULTY: Economies of scale are illustrated in Exhibit 6.5, which visually shows the range of scale impacts. Royal
Caribbean Cruises is betting on economies of scale. It launched its Oasis class $1.4B luxury cruise ships, the Allure of the
Seas and Oasis of the Seas—the world’s largest at 20 stories above the sea and stretching more than four football fields. The
Oasis of the Seas can accommodate more than 5,400 passengers. Will it allow Royal Caribbean to capture economies of
scale, or will it prove too large, leading to diseconomies of scale?
POWERPOINT SLIDE 26
The example of W. L. Gore for diseconomies of scale comes from the very readable book The Tipping Point by Malcolm
Gladwell. In the book, Gladwell goes on to discuss a Dunbar Number, which is named after a UK scholar (Robin Dunbar).
He argues that humans have cognitive limits at around 150 friends. Gore has expanded the idea into effective work group size
limits due to excess bureaucracy and management that slows down decision making as the group size grows.
POWERPOINT SLIDE 27
Chipmaker AMD cannot muster the scale in production that Intel enjoys and thus is not able to drive down its cost as much.
This puts AMD at a competitive disadvantage.
One of the biggest challenges for the cost-leadership strategy is that there are often low barriers to imitation in cost cutting.
As an example, you can discuss the flurry of phone makers trying to imitate Xiaomi’s strategy (see “Rivals try to reinvent
Xiaomi business model” E Dou 9/8/15 The Wall Street Journal).
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Strategy Highlight 6.1

POWERPOINT SLIDES 30–31: DR. SHETTY: “THE HENRY FORD OF HEART SURGERY”
This is a useful example of cost leadership for students because it shows that the cost-leadership strategy is not confined
exclusively to commodity products or frequently purchased items. It also incorporates more than one aspect of cost drivers,
mentioning learning curves, economies of scale, and input costs.
DISCUSSION TOPICS
EXPERIENCED FACULTY: Scale benefits explain the rise of superstores that are often 200,000 square feet or more. Retailers
that have leveraged the superstore concept to emerge as category killers are Toys“R”Us, Home Depot, Barnes & Noble, and
Best Buy. Now in a new wave of industry evolution, Amazon is “killing the category killers.” Ask students if they can
explain why this is happening using economies of scale and learning. They should be able to identify much higher throughput
through Amazon’s fulfillment centers than through any individual store. They may also point out that consumers do their
own product selection and checkout in Internet commerce, raising the level of sales per employee at Amazon.
POWERPOINT SLIDE 24
NEWER FACULTY: Consider Southwest Airlines, what happens to competitive advantage when a firm with a cost-leadership
strategy changes its target customer from one with basic needs to one with more complex needs or expands into high
cost/high time delay airports as Southwest has done with its moves into Newark, LaGuardia, Los Angeles, and San Francisco,
and added the increased complexity of international flights? Which parts of the value chain have experienced increased costs?
POWERPOINT SLIDE 23
EXPERIENCED FACULTY: By its third year of operation (2013), Xiaomi had captured 5 percent of the Chinese smartphone
market. It expects to almost triple its sales in 2014. It sells its handset for approximately half the price of an iPhone 5C. They
sell the phone at near cost and seek supplemental revenue from sales of accessories and branded merchandise. In a process
somewhat akin to that of Threadless, they seek user suggestions on tweaks to its version of the Android OS and send users
weekly updates. (See “How upstart Xiaomi rattled China’s smartphoneindustry” The Wall Street Journal 10/8/13.) Use this
example to reinforce the idea that cost leaders do not have to be price leaders, they just have the capability to do so. Remind
students that Chapter 5 emphasized the importance of profit to competitive advantage; thus, growing market share does not
imply a competitive advantage, if there is no operating profit. Then lead a discussion on whether students think that Xiaomi’s
business strategy is sustainable for the long term. If not, how might they tweak the strategy to increase profitability without
alienating customers? Would this strategy be effective outside of China? AACSB 2015 Standard 9 Managing in a global
context

The chapter notes there are key differences between economies of scale and learning effects. Let us put that into
practice with a brief example. A company such as Intel has a complex design and manufacturing process. For
instance, one fabrication line for semiconductors typically costs more than $1.5B to build. Yet the industry also has
high human costs for research and development (R&D) departments. Semiconductor firms spend an average of 17
percent of revenues on R&D. For comparison the automobile industry spends a mere 3 percent of sales on R&D. Thus
Intel’s management must be concerned with both scale of production and learning curves. When do you think
managers should be more concerned with large-scale production runs, and when do you think they should be most
concerned with practices that would foster or hinder the hiring, training, and retention of key employees?
12
Many students will bring work experience to the classroom. At the MBA level, many students will have professional work
experience and can make some contributions on HR practices. One point of this question is to note that HR practices will
tend to be quite different for a differentiated firm than a cost-focused business. Intel would want to focus on retaining its
employee base since the learning curves and experience curves in both design and manufacture of its product is significant.
They undergo a thorough recruitment and hiring screening process to try to bring the right skill sets into the firm. Intel also
commits major funding into training, including educational support for advanced degrees, and they encourage a sabbatical
leave for employees with many years of service.
END OF CHAPTER SMALL GROUP EXERCISE 2

Ryanair clearly has a cost-leadership strategy. They are providing lower-value services and driving their costs low or
generating revenues from fees other airlines are not charging to offset some of their costs. We chose Ryanair as an example
of low-cost leadership to extend the chapter case discussion with a non-U.S. example. Students enjoy finding out about the
Irish company and reflecting on how, in many ways, Ryanair is in the leadership position on cost and price structures.
Ryanair based in Dublin, Ireland has been renowned in Europe as a firm that can make a profit on a $20 ticket by
imposing numerous fees and surcharges. The airline has sought to be the lowest of the low-cost providers in the EU
with a “no frills get you from point A-to-B-model.” More recently Ryanair is on record as saying it wants to be the
“Amazon.com of travel in Europe” by bringing in competitors’ price comparison, hotel discounts, and even concert
tickets. Check out the company website (http://www.ryanair.com) and consider the questions that follow.
If you were a competitor in the European market, such as British Airways or Lufthansa, how would you compete
against Ryanair, knowing your cost structure would not allow price parity? If you were a low-cost leader like EasyJet,
how would you compete against Ryanair?
The website link is provided here as the firm may well change its policies on disclosure of fees. This is especially true as
other more traditional airlines are also imposing more fees on the flying passengers. As of the autumn of 2015, the home
page for Ryanair has a link for fees at the bottom of the page in the small print menu under “Information.” Once you click the
button, it opens to two rather legal-looking tables of different fees.
The traditional European airlines do not have a cost structure to compete with Ryanair. U.S. airline attempts to lower cost
structures (such as Delta’s Song or Continental Lite) were a dismal failure. Therefore, the competitors should compete
against Ryanair on differentiated service and acknowledge some ultra-low price routes will be difficult to grow in share. At
the same time, the competitors, however, should be sure that consumers are comparing “fully loaded” costs rather than
comparing an $8 seat on Ryanair with a $150 seat on Aer Lingus. The competition should not be shy about posting
comparable rates for Ryanair and their own prices (with fees included). Many customers will make different decisions if the
actual travel costs are $87 for Ryanair versus $165 for Aer Lingus.
What similarities and differences do you find about Ryanair compared to JetBlue from the ChapterCase?
Perhaps the most salient conclusion that students will reach is that Ryanair makes no pretenses of offering high levels of
customer service. They do not have any issues with being “stuck in the middle” as they are firmly focused on cutting all costs
and charging additional fees for what minimal services that they do offer. Both airlines run point-to-point routes and neither
interlines baggage.
13
6.4 Business-Level Strategy and the Five Forces:

Benefits and Risks LO 6-4
END OF CHAPTER ETHICAL/SOCIAL ISSUES 1

Suppose Procter & Gamble (P&G) learns that a relatively new startup company Method (www.methodhome.com) is
gaining market share with a new laundry detergent in West Coast markets. In response, P&G lowers the price of its
Tide detergent from $18 to $9 for a 150-oz. bottle only in markets where Method’s product is for sale. The goal of this
“loss leader” price drop is to encourage Method to leave the laundry detergent market. Is this an ethical business
practice? Why or why not?
Notice we did not ask if this is legal. There are many practices that are legal, but may not be considered ethical or moral
behavior. A loss leader approach is not uncommon in retailing and larger firms can afford to do it longer than smaller firms.
Students will differ on whether this is ethical, but it is a practice that smaller firms such as Method should be prepared to
address. (In the case of Method, they are highly differentiated in their products and target customers and are unlikely to be
significantly affected by such a price move.) AACSB 2015 Standard 9 Ethical understanding and reasoning (able to identify
ethical issues and address the issues in a socially responsible manner)
EXPANDED THEORY
EXPERIENCED FACULTY: Companies seek to reach the productivity frontier, which represents a set of best-in-class strategic
positions the firm can take relating to value creation and low cost at a given point in time. Reaching the productivity frontier
increases the likelihood of achieving a competitive advantage. Falling behind the productivity frontier, in contrast, results in a
competitive disadvantage. A firm’s business strategy determines which strategic position it aspires to along the productivity
frontier. Strategic positions can—and need to—change as the external environment changes with shifts in the five forces and
macroenvironment. Changes in the industry environment allow firms to stake out more valuable positions and turn inferior
performance into a competitive advantage. By the same token, as industries change, once-leading companies that held
strategic positions along the productivity frontier may fall behind.
To illustrate this concept, let’s look at the competitive dynamics in the $350B PC industry between 2010 and 2013. Since
2010 the industry has been in decline, partially due to consumer substitution with tablet computers or smartphones.
You can demonstrate the dynamics of competitive positioning by visualizing the different competitive positions of Apple,
Dell, HP, and Lenovo over time. The horizontal axis in the chart indicates best practice in cost leadership, and the vertical
axis indicates best practice in differentiation. Combining cost leadership and differentiation, the company that seeks a blue
14
ocean strategy stakes out a position in the center part in the best-practice frontier (somewhere between the axes). The dotted
line shows the productivity frontier. The year 2010: As a differentiator, Apple had carved out a strong strategic position.
Using superior hardware and software integration capabilities in combination with excellent marketing, Apple turned a
commodity into a differentiated product. Consumers paid a
premium price for a superior user experience. Consumer
preferences had moved to value-added features such as seamless
integration of PCs with mobile devices that left the other
competitors (HP, Lenovo, and Dell) behind the productivity
frontier. Apple’s successful serial innovations in mobile devices
combined with the iTunes Store drove up demand for Apple’s
Macs because consumers wanted one central hub to manage all
their mobile devices and content conveniently. Given their
stronger focus on corporate IT departments than the consumer
market, HP, Dell, and Lenovo were hit harder by the 2008–2009
recession than Apple. HP attempted to stake out a blue ocean
strategic position, providing “high-tech at low cost,” but was
unable to reconcile the thorny cost-differentiation trade-off. HP
was unable to reach the productivity frontier. Lenovo did not yet
have a clear strategic profile as either a differentiator or low-cost
leader. Nor did it have a strong presence outside China and other
Asian markets. Both HP and Lenovo were stuck in the middle,
able to offer neither value-creating differentiation nor low cost,
ending up with strategic positions below the productivity frontier. Dell’s strategic position as cost leader appeared no longer
as valuable as in the early 2000s, because one of the key competitive success factors became differentiation. Dell fell behind
the productivity frontier as market demand shifted to more value-added features which Dell could not offer.
Fast-forward to 2013: The competitive dynamics look quite different. Apple has been struggling to continue its innovation
home runs. Apple strove to reduce costs to compete more effectively outside the U.S. and its pace of innovation slowed
relative to rivals, such that its products were less distinctively differentiated. It changed its strategic position more toward
blue ocean, but fell behind the productivity curve. Partly as a consequence of a failure to clearly formulate a business and
corporate strategy, demand for HP computer hardware fell by as much as 25 percent. Likewise, Dell continued to experience
difficulties in changing its strategic position, moving from a well-executed cost-leadership strategy toward more of a blue
ocean, but without the substantial and cumulative R&D investment of its rivals. Lenovo was able to carve out the clearest
strategic profile. It executed well on its strategic decision to focus on the higher end of the market by providing laptops and
desktops with outstanding performance. Lenovo moved to the productivity frontier, occupying the position of a clear
differentiator. Demand for PCs was in free-fall during this time period, and all competitors—except Lenovo—lost significant
market share. Clear strategic positioning rewarded the company with a competitive advantage.
Fast forward to 2016: After explaining this concept to students, you could ask them to extend the productivity frontier to
2016, plotting each firm’s position, as a homework assignment.
6.5 Blue Ocean Strategy: Combining

Differentiation and Cost Leadership LO 6-5

Renee Mauborgne, coauthor of Blue Ocean Strategy provides a brief overview of the thinking behind this theory. It can be
used to introduce your lecture on this topic or to add interest to an online course.
15
EXAMPLES
POWERPOINT SLIDE 38
NEW FACULTY: A successful blue ocean strategy requires that trade-offs between differentiation and low cost are reconciled.
This is often difficult because differentiation and low cost are distinct strategic positions that require the firm to effectively
manage internal value chain activities that are fundamentally different from one another. For example, a cost leader would
focus research and development on process technologies in order to improve efficiency, but a differentiator would focus
research and development on product technologies in order to add uniqueness.
POWERPOINT SLIDE 40
Success in a blue ocean strategy doesn’t imply that the firm must be the highest-value creator and the lowest-cost producer in
its respective industry. Whether a blue ocean strategy can lead to competitive advantage depends on the difference between
value creation (V) and cost (C), and on the resulting magnitude of economic value created (V – C). What matters in gaining
competitive advantage is the relative difference in economic value creation in comparison to industry rivals. The goal of a
blue ocean strategy is therefore to achieve a larger economic value created than that of rivals pursuing a differentiation or
low-cost-leadership strategy. To illustrate this point, compare three retail chains: Nordstrom, Target, and Walmart.
Nordstrom is a differentiator; Walmart is a cost leader; Target has a blue ocean strategy. Nordstrom is an upscale retailer
pursuing a differentiation strategy by focusing on a superior customer experience in a luxury department store setting. Target
has been able to effectively compete with Nordstrom mostly by achieving a much lower-cost position, while offering an
acceptable shopping experience when compared with Nordstrom. On the other hand, Target has been able to compete with
Walmart by building similar skills in efficient logistics. Target almost achieves cost parity with Walmart. At the same time,
Target outdoes Walmart in product selection, merchandising, and store layout so that its stores offer a higher-quality
shopping experience for the customer. Target creates significantly more value in the minds of customers than does Walmart
with its no-frills approach. If Target is successful with its blue ocean strategy, it achieves the highest economic value.
POWERPOINT SLIDE 40
Examples of ways in which firms can simultaneously add value and lower cost: Through techniques such as total quality
management, companies design and build products with quality in mind, while increasing their differentiated appeal. By
building in better quality, companies lower the cost of both production and after-sale service requirements. From the
customer’s perspective, the product has increased value because it reduces the total cost of ownership. Advances in
manufacturing and information technology have made feasible mass customization—the manufacture of a large variety of
customized products or services done at a relatively low unit cost. In the car industry, Toyota was the first to introduce lean
manufacturing, allowing it to mass customize vehicles and produce higher quality at a lower per-unit cost. Other companies
are able to conquer this trade-off by using the Internet. You can design your own T-shirts at threadless.com or create
customized sneakers at nike.com.
POWERPOINT SLIDE 40
Amazon is using “gig workers” to deliver packages in Seattle. They are taking advantage of the availability of low-cost part-
time independent contractors to deliver an enhanced customer service (delivery times as fast as one hour) at low cost. (See
“Amazon Taps ‘On-Demand’ Workers for One-Hour Deliveries” G Bensinger 9/29/15 The Wall Street Journal.)
POWERPOINT SLIDE 41
The startup Leopard Cycles, founded in 2004, shows how to address the necessary trade-offs inherent in a blue ocean
strategy. A customized road-race bicycle like those ridden by professionals such as Lance Armstrong, Alberto Contador, or
Meredith Miller was once an expensive proposition that could cost up to $20,000. Combining the latest flexible-
manufacturing techniques with Internet-enabled technologies, Leopard Cycles offers mass-customized race bicycles built
with advanced materials such as carbon fiber. Leopard Cycles describes how it addresses the trade-off between value and cost
as follows: “Being the low-cost producer is mutually exclusive with exotic materials; however, we’re a firm believer that you
don’t have to be the most expensive to be the best.” This position implies that an integration of low cost and product
differentiation enables companies to increase the perceived value of their products, while keeping the cost increase in check.
Leopard Cycles prices its customized road-race bikes between $1,500 and $2,500, much less than what one would have paid
for such a specialized bicycle just a few years before.
POWERPOINT SLIDE 41
Avon has been able to raise the perceived value of its products while lowering its production costs. Under the leadership of
its CEO, Andrea Jung, it began to pursue a blue ocean strategy in 2002 by investing over $100m in R&D and building a new
research facility. Avon’s R&D investments were intended to increase the perceived value of its products, by developing
cosmetics that look good and are good for the skin. In the same year, she began to lower Avon’s cost structure by investing
16
more than $50m into optimizing its supply chain. Avon’s shift from a differentiation strategy to an integration strategy
seemed to be successful initially, but the firm has struggled since the 2008 recession.
Electrolux, the world’s number 2 appliance manufacturer, entered China with a cost-leadership strategy. What they learned
was that they did not have the operating cost structure or the scale to compete effectively with the Chinese domestic
manufacturers as a cost leader. They closed most of their Chinese manufacturing capacity in 2013 and formulated a strategy
to change to a differentiated position with imported products. Ask students to estimate the locations for both strategies on the
productivity frontier. Electrolux plans increases in R&D from 2 percent of sales to 3 percent of sales. What other steps will
they need to take to be successful as a differentiator in China? (See “Wash, rinse, rebrand: Electrolux spiffs up appliances in
China” The Wall Street Journal 9/20/13.) AACSB 2015 Standard 9 Managing in a global context
Toyota introduced lean manufacturing to resolve the trade-off between quality and cost. This process innovation allowed
Toyota to produce higher-quality cars at a lower unit cost, and to perfect the mass customization of cars. Lean manufacturing,
over time, has become a necessary but not sufficient condition for competitive advantage in the auto industry. Today, if a
carmaker can’t produce high-quality, mass-customized cars at low cost, it is not even in the game. More recently, Toyota
stumbled as questions arose whether the company could maintain its stellar quality record while growing so fast. Korea’s
Hyundai stepped into this void, offering cars that surpass Toyota in quality while attempting to provide luxury similar to
Lexus vehicles. Hyundai’s managers carved out a strong strategic position for the company by focusing on resolving the
trade-offs between luxury, quality, and cost. The ups and downs in the car industry clearly show that competitive advantage
is transitory. It is a difficult quest to gain competitive advantage; it is even more difficult to sustain it. The tools of strategic
management aid managers in this important challenge.
Strategy Highlight 6.2

POWERPOINT SLIDES 44–45: HOW JCPENNEY SAILED DEEPER INTO THE RED OCEAN
Sadly for JCPenney this is an excellent example of how changes in strategic position can go badly wrong. At first glance, the
strategy change made sense. JCPenney was doing poorly with its cost-leadership strategy because it was not the cost leader.
It did not have the economies of scale, supply management processes, or data management systems to compete with cost
leaders, like Walmart. It did not have the buying or merchandizing savvy to compete effectively with Target or Macy’s, much
less any of the differentiation leaders among department stores. Its stores were not well located and were badly in need of
updating. So clearly some significant change in strategy was needed. This is a good opportunity to remind students that they
learned in Chapter 4 that intangible resources were often in the minds of customers, such as brand value, brand awareness,
and brand personality, or in the minds of employees, such as creative ideas, firm culture, and customer service processes. A
radical strategy change, such as that undertaken at JCPenney, runs the risk of destroying those perceived intangible resources.
Brand perceptions, in this case, had to be completely altered in the minds of existing customers instantly while at the same
time making them like the new perception better than competitors they understand better. Alternatively, the firm would have
had to acquire a whole new set of customers, who would have had to been drawn away from competitors (with whom they
were presumably satisfied) without price inducements.
17
INTEGRATION
Case Analysis and Interactive Labeling : Blue Ocean Strategy
This click-and-drag activity builds student comprehension of the differences between a successful value innovation
strategy and a firm that is “stuck in the middle.” The student will read the brief case that complements the textbook
description of IKEA and the retailing industry. Then, the student will move the labels to their correct locations. Then the
student will complete a related quiz with three questions. Difficulty: Medium Blooms: Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from the “click-and-drag” by having students discuss the
different drivers that a successful blue ocean strategy requires. Discussion question 3 at the end of the chapter suggests
using the value chain tool from Chapter 4 to compare how the value chain activities would be different for firms using
cost leadership, differentiation, and value innovation as their business-level strategies.
DISCUSSION TOPICS
Drawing on knowledge from your supply chain and operations management majors, ask students to discuss how the digital
revolution in manufacturing might create new opportunities for blue ocean strategies (see “The digital-manufacturing
revolution: How it could unfold” Oct 2015 McKinsey Quarterly). AACSB 2015 Standard 9 Integrating knowledge across
fields
18

POWERPOINT SLIDE: 43
How can a firm attempting to have a blue ocean business-level strategy manage to avoid being “stuck in the middle”?
The business needs to carefully assess how the value gap will be impacted by moving to a blue ocean strategy. If they find
the gap is reduced and can’t figure a way to either increase value or decrease cost to enlarge it again, the business should
choose which generic strategy to implement (differentiated or cost leader) and cease trying the blue ocean approach.
Additional or improved features or services need to be able to be produced at a cost less than their perceived value.
END OF CHAPTER ETHICAL/SOCIAL ISSUES 2

In the chapter discussion on value innovation, IKEA is noted as a firm that has successfully applied these techniques.
What roles, if any, do sustainability and triple-bottom-line factors have in the success of IKEA as a leader in the
furniture industry? (See Chapter 5.)
IKEA takes a three-pronged approach to sustainability. It makes, promotes, and sells products that help people live more
sustainably; it increasingly acquires raw materials and energy from sustainable sources; it strives to have a positive impact
upon the communities in which it does business. All three of these sustainability platforms are closely tied to the firm’s
vision and values (Chapter 2). Its value innovation strategy, however, is highly dependent upon reducing costs and weight in
their products, as well as long-term access to adequate supplies of wood and other materials.
Research Update
Shinkle, G. A., Kriauciunas, A. P., and Hundley, G. (2013), Why pure strategies may be wrong for transition
economy firms. Strat. Mgmt. J., 34: 1244–1254. doi: 10.1002/smj.2060
EXPERIENCED FACULTY: These authors conducted research on transitional economies that were formerly part of the
USSR. They found that pure cost leadership or differentiation strategies were more beneficial than mixed strategies,
consistent with Porter’s theory, in market-oriented environments. However, in low market-orientation environments, they
found pure strategies to be detrimental and attributed that result to a need for ambidexterity and organizational learning in
conditions of high uncertainty. After sharing these results with the students, pair an international student from a
developing nation with one or more domestic students and invite them to discuss why these conclusions might make
sense.
19
6.5 Blue Ocean Strategy: Combining

Differentiation and Cost Leadership LO 6-6
STRATEGY SMART VIDEO EXAMPLE

POWERPOINT SLIDE 73
The brief video in this slide illustrates the strategy canvas for two rivals in the airline industry, linking it nicely to the
ChapterCase.
EXERCISES
The Wall Street Journal professor site1 suggests a small group exercise on using the strategy canvas of Kim and Mauborgne
to map the differences between retail stores using slow shopping with those using fast shopping (see “The slower you shop,
the more you spend” E Byron 10/20/15 The Wall Street Journal). As an extension of Strategy Highlight 6.2, it could be used
to map the before and after differences, if JCPenney were to implement slow shopping.
Primark is the cost leader in the UK among clothing retail stores. Ask students to develop a strategy canvas to show whether
there is a unique place for Primark to carve out a competitive advantage in the U.S. market (see “Primark throws its hat into
U.S. ring” S Chaudhuri 9/9/15 The Wall Street Journal).
If you used the Whole Foods discussion questions earlier in this guide, ask students to use a strategy canvas to compare
Whole Foods to the Trader Joe’s example in Section 6.2.
Implications for Strategists


In Chapter 4, we discussed the internal value chain activities a firm can perform in its business model (see Exhibit
4.8). The value chain priorities can be quite different for firms taking different business strategies. Create examples of
value chains for three firms: one using cost leadership, another using differentiation, and a third using a value
innovation business-level strategy.
Have the students review Chapter 4 to answer this question. In general, cost-leader firms will focus on primary activities and
making them the most efficient. Differentiated firms will focus on secondary activities and providing improved customer
service, while value innovation firms will choose a combination of these activities to strategically extend value while holding
or reducing costs.
1 Mark Lehrer Strategy Weekly Review email 10/20/15 The Wall Street Journal
20
Extended Discussion
P&G is a firm with a long history of success with a differentiation strategy that has had difficulty adapting to a change
in the external environment (see “P&G CEO takes responsibility for company’s performance” S Ng 10/13/15 The Wall
Street Journal and “Procter & Gamble sales dip, but profit rises” S Ng and C Dulaney10/23/15 The Wall Street
Journal). The fact that it is a diversified firm gives you an opportunity to draw the distinction that diversified firms can
set a unique business-level strategy for each industry in which they participate. It might help the students to apply the
chapter concepts better if you ask them to focus for this discussion on a particular product-market business, for example
U.S. laundry detergent. In this market, P&G dominates the high end of the market with a proliferation of incrementally
different Tide products. They have a very strong position in the mid-tier of the market with Gain, Cheer, and Era.
During the recent extended recession, consumers have been moving from the top- and mid-tier to the lowest tier of the
market, causing a loss of market share and profitability for P&G. P&G expected that trend to reverse as the economy
recovered, but it has not done so. P&G’s high marketing intensity and R&D intensity make it difficult for them to
compete on price with the cost leaders.
P&G is pursuing a differentiation strategy. Looking at the value and cost drivers discussed in this chapter and
the table entitled “Competitive Positioning and the Five Forces: Benefits and Risks of Cost Leadership and
Differentiation” in Exhibit 6.7, identify the factors causing P&G’s business strategy to lose its luster. Why is
P&G’s differentiation strategy no longer as potent as it once was?
In the macroenvironment, P&G experienced a powerful impact from the recession, which surprised them somewhat
because detergent had typically been a somewhat “recession-proof” industry. They saw a shift in consumer behavior
with an increased willingness to sacrifice products with P&G’s intangible resources of reliability, superior product
performance, and brand reputation for price savings that impacted most of the five forces listed in Exhibit 6.7. In the
industry structure, we have seen a rise of new entrants, both those focused on a segment that places a high value on
sustainable, natural products and in private-label store brands. As sales shifted from P&G to store brands, P&G’s
negotiating power with its direct customers (retailers) declined.
P&G has cut its R&D spending, cut other costs, and reduced staffing. Does the firm risk being “stuck in the
middle”? Why or why not? If yes, why would being “stuck in the middle” be a bad strategic position?
Even cutting its R&D and advertising costs, P&G will still be higher cost than private label products. Reductions in the
incremental innovation that P&G has achieved in the past and media spending may further erode the price premium that
the firm’s products attract due to brand reputation and superior product performance. Thus, they seem to be headed
toward a “stuck in the middle” position. They could keep their higher prices and increase couponing, thus targeting
price savings to their most price sensitive consumers, but that encourages the “only buy when it is on sale” pattern that
can be destructive to long-term profitability.
Your task is to help the new CEO, David Taylor, sharpen P&G’s strategic position. Which strategic position
should P&G stake out? Which value and/or cost drivers would you focus on to improve P&G’s strategic profile?
How would you go about it? What results would you expect?
Students may point out that a differentiation strategy for a product that is distributed through mass market retailers must
be supported by a strong pattern of continuous innovation (you cannot differentiate on service through that channel).
Other students may point out that the price differential between the high and low ends of this market are unsustainable,
suggesting that P&G needs to be very aggressive on cost reductions. Recently P&G has announced a decision to sell a
version of Tide among its mid-tier offerings, in the hopes that this will cause the consumers who have traded down to
the lowest-tier products to come back up to mid-tier P&G products. The new product will be called Tide Simply Clean
and Fresh and will be marketed in a yellow container, rather than orange, and separated on the retailer shelves from
other Tide products. With the lowest-tier market retailing for 7 cents per load and Tide retailing for 20 cents per load,
P&G’s risk of margin cannibalization from this strategy are very high. (See “P&G unveils plan for a budget Tide” The
Wall Street Journal 9/4/13.) AACSB 2015 Standard 9 Application of knowledge and Framing problems and developing
creative solutions
21
DISCUSSION TOPICS
Hispanics are a growing segment of the audience for Hollywood movies. How might you implement a focused differentiation
strategy as a movie studio or movie theater chain targeted toward the Hispanic segment? The Wall Street Journal article
“Hollywood takes Spanish lessons as Latinos stream to the movies” 8/9/13 offers some obvious ideas, such as Hispanic cast
members and Spanish-speaking parts. It also points to targeting the action/adventure genre that has strongest appeal in the
Hispanic segment and promoting the films on Univision. However, students are likely to come up with more ideas, such as
serving some Hispanic foods in the theaters and promotional tie-ins with popular telenovelas or Latino literature. AACSB
2015 Standard 9 Application of knowledge (able to translate knowledge of business and management into practice)
To illustrate the point that focus strategies require an intense understanding of the target customer segment and the ability to
anticipate changes in customer needs and preferences within that group, you might want to use a teen clothing retailer.
Abercrombie & Fitch grew rapidly in this segment for a few years, but then it lost its “touch” during the recent recession.
Students are likely to be able to add to this discussion with examples of firms that specifically target their demographic with
varying degrees of success.
Tiffany can be thought of as a classic differentiator using value drivers including product quality, innovation, and brand
reputation to command premium pricing in the marketplace. But even Tiffany has a lower price category in its silver jewelry.
Tiffany has resisted price reductions on silver jewelry to be competitive and perhaps new product innovation has fallen
behind. What do you think Tiffany should do to restore growth? (See “Tiffany looks for new silver-linings playbook” The
Wall Street Journal 3/21/13.)
EXERCISE
Students enjoy the opportunity to practice implementing generic strategies. You can choose any consumer industry and
assign one of the four generic strategies to each team of students. Then invite the students to plan a new business in that
industry with that strategy. Ask them to identify the value and cost drivers and describe how they will implement them for
their firm. Then ask them to develop a marketing message for their firm in the form of a Facebook page, a video “celebrity”
endorsement, a podcast radio ad, or a flip chart “billboard.” Ask the class to vote on which business/product they would
visit/buy most often. Some retail industries you might use: yogurt shops, coffee shops, gyms, hotels, or spas. Some consumer
products you might use: shampoo, frozen pizzas, or salad dressings. AACSB 2015 Standard 9 Integrating knowledge across
fields and Application of knowledge (able to translate knowledge of business and management into practice)
Strategy Term Project: Mission, Goals, and the

Strategic Management Process
Term Project Module 6
In this section, you will study the business strategy of the firm you have previously selected for this project. Be sure to
instruct the students to focus only on ONE business unit if they have selected a larger firm with several operations.
Does your selected business have differentiated products or services? If so, what is the basis for this differentiation
from the competition?
Differentiation or cost focus can often be determined from a close examination of the annual report. All firms will talk about
costs, but a differentiated firm will also highlight how it views its products (service) to be different from the competition. The
students can review the Value Drivers section of the text for some thoughts on the basis of the differentiation.
Does your firm have a cost-leadership position in this business? If so, can you identify which cost drivers it uses
effectively to hold this position?
Financial analysis of the focal firm and key competitors is the clearest way to determine if the firm has cost leadership. Many
students will be tempted to take the easier-to-find price differential as a signal on costs, but due to profitability levels this can
be misleading, particularly over a short time frame (such as one year). Be sure to help the students focus on costs found in the
financial section of the annual report of many industry websites.
22
23
What is your firm’s approach to the market? If it segments the market, identify the scope of competition it is using.
The market scope should be taken relative to the competitors in the industry of focus. For example, in the furniture industry
IKEA is primarily appealing to college-aged consumers and young families just starting out, and has a more narrow approach
than other retailers such as Ashley Furniture or La-Z-Boy.
Using the answers to the preceding questions, identify which generic business strategies your firm is employing. Is the
firm leveraging the appropriate value and cost drivers for the business strategy you identified? Explain why or why
not.
This answer makes sure the students can apply the concepts of this chapter to their focal firm. You may want to direct
students to look at Exhibit 6.9 on the value and cost drivers if they are still unsure at this point how to categorize the business
unit or firm.
As noted in the chapter, each business strategy is context-dependent. What do you see as positives and negatives with
the selected business strategy of your firm in its competitive situation?
The section on the relationship to the five forces benefits and risks is likely to be helpful with the student thinking through
this question.
Create a strategy canvas (see Exhibit 6.10) for your firm. Set on the horizontal axis an appropriate selection of the
value curve items and on the vertical axis, set the other industry segments (such as strategic groups) for comparison.
At this point, it is important to emphasize for the students the importance of taking the time to select axes that are meaningful
in the context of competition and competitive advantage within the industry.
What suggestions do you have to improve the firm’s business strategy and strategic position?
Here, the student should think through the chapter material and the copious information they have already collected on the
firm and make some suggestions for how the firm could improve its position either now or, thinking of the dynamics of
competitive position, how it might change in the future. AACSB 2015 Standard 9 Analytical thinking (able to analyze and
frame problems) and Making sound decisions and exercising good judgment under uncertainty
INTEGRATION
HP Running Case: Module 6

While offering each student the opportunity to explore and analyze the company of his/her choice can add interest to the
exercise, there are many advantages for an instructor when the entire class works on the same firm. Connect allows you to
do this with a running case for a single firm that encompasses every chapter in the textbook and tracks the Strategy Term
Project. Hewlett-Packard is provided as an example firm your students can use to see what information and analysis
would be helpful to cover this portion of the term project.
Note to the Instructor, Question 12 (Graduate Level): The answer to this question is subjective based on the student’s
opinion as well as the discussion points that have been reviewed in class. Some points to consider when checking their
answer for thoroughness and logic include: the types of customers that HP serves, the customer needs that HP attempts to
satisfy, the intent behind why HP wants to satisfy their customers, and how HP is positioned to satisfy those customer
needs.
24
my Strategy
Employees and consultants say the Amazon workplace is the epitome of a “do more for less cost” environment. We
recognize this is a hallmark goal of a cost-leadership business strategy. But ask yourself this key question, Is it the type
of high-pressure work environment in which YOU would thrive? By 2020 Amazon is planning to have space for 50,000
employees in its Seattle office buildings (an increase of three times the number of employees in 2013). They will be
offering bold new ideas and moving Amazon toward being the first trillion-dollar retailer under an intense pressure to
deliver on their goals. The allure from this type of success is compelling and offers tremendous rewards to many
employees, shareholders, and customers. What aspects of success are you seeking in your professional career? Before
you launch into a new project, job, or firm, or even before you make a change in industry in the effort to move
forward in your career, always consider the trade-offs that you would and would NOT be willing to make.
This could be a particularly interesting conversation to have in class, especially if you have students that represent multiple
generations. You may find that millennials on average are more likely to “work to live” than “live to work”. Gen Xers on
average may find a high pressure/high reward environment more attractive. A number of students may suggest that they
would prefer a small firm or an entrepreneurial start-up to a 50,000 person firm, no matter what pressure level is involved.
25

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Strategic Management 3e Instructor Manual

Solution Manual for Strategic Management 3rd Edition

Business Strategy: Differentiation, Cost Leadership, and

ChapterCase: JetBlue: “Stuck in the Middle (Seat)”?

POWERPOINT SLIDES 1–5

CONSIDER THIS DISCUSSION QUESTIONS

6.1 Business-Level Strategy: How to Compete for

STRATEGY SMART VIDEO LECTURE

END OF CHAPTER DISCUSSION QUESTION 1

END OF CHAPTER SMALL GROUP EXERCISE 2

6.2 Differentiation Strategy: Understanding Value

STRATEGY SMART VIDEO LECTURE

Case Analysis: Toyota Value Drivers Case

STRATEGY SMART VIDEO EXAMPLE

6.3 Cost-Leadership Strategy: Understanding Value

STRATEGY SMART VIDEO LECTURE

Strategy Highlight 6.1

END OF CHAPTER DISCUSSION QUESTION 4

END OF CHAPTER SMALL GROUP EXERCISE 2

6.4 Business-Level Strategy and the Five Forces:

END OF CHAPTER ETHICAL/SOCIAL ISSUES 1

6.5 Blue Ocean Strategy: Combining

STRATEGY SMART VIDEO LECTURE

Strategy Highlight 6.2

Case Analysis and Interactive Labeling : Blue Ocean Strategy

END OF CHAPTER DISCUSSION QUESTION 2

END OF CHAPTER ETHICAL/SOCIAL ISSUES 2

6.5 Blue Ocean Strategy: Combining

STRATEGY SMART VIDEO EXAMPLE

Implications for Strategists

END OF CHAPTER DISCUSSION QUESTION 3

Strategy Term Project: Mission, Goals, and the

HP Running Case: Module 6

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