Ch6BUS498: Business Strategy: Differentiation, Cost Leadership, and

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business-level strategy that successfully combines differentiation and
Blue ocean strategy cost leadership activities using value innovation to reconcile the
inherent trade-offs
the goal-directed actions managers take in their quest for compet- itive
Business-level strategy advantage when competing in a single product market
generic business strategy that seeks to create the same or similar value
Cost-leadership strategy
for customers at a lower cost
generic business strategy that seeks to create higher value for
Differentiation strategy
customers than the value that competitors create
Diseconomies of scale increases in cost per unit when output increases
Economies of scale decreases in cost per unit as output increases
savings that come from producing two (or more) outputs at less
Economies of scope cost than producing each output individually, despite using the same
resources and technology
same as the cost-leadership strategy except with a narrow focus
Focused cost-leadership strategy
on a niche market
same as the differentiation strategy except with a narrow focus on
Focused differentiation strategy a niche market

output range needed to bring down the cost per unit as much as
Minimum efficient scale (MES) possible, allowing a firm to stake out the lowest-cost position that is
achievable through economies of scale
the size - narrow or broad - of the market in which a firm chooses
Scope of competition
to compete
choices between a cost or value position. Such choices are nec-
Strategic trade-offs essary because higher value creation tends to generate higher cost
graphical depiction of a company's relative performance vis-à-vis its
Strategy canvas competitors across the industry's key success factors
horizontal connection of the points of each value on the strategy
Value curve canvas that helps strategists diagnose and determine courses of action
the simultaneous pursuit of differentiation and low cost in a way that
creates a leap in value for both the firm and the consumers; considered a
Value innovation cornerstone of blue ocean strategy
"How we will compete to gain & sustain competitive advantage in
What is business-level strategy?
a single product market?"
What questions you have to consider when selecting your busi- ness-
Who: which customer segments will we serve?, What: customer
level strategy?
needs, wishes, and desires will we satisfy?, Why: do we want to
satisfy them?, How: will we satisfy our customers' needs?
What questions you have to consider when selecting your busi- ness-
level strategy? Who:
which customer segments will we serve? customer
What questions you have to consider when selecting your busi- ness-
level strategy? What:
needs, wishes, and desires will we satisfy?
What questions you have to consider when selecting your busi- ness-
level strategy? Why:
do we want to satisfy them?
What questions you have to consider when selecting your busi- ness-
level strategy? How:
will we satisfy our customers' needs?

Industry and Firm Effects Jointly Determine Competitive Advan- tage,

Words of caution about business level strategy Strategic trade-offs are often needed [Choices between a cost or value
position (there is tension between them), Purpose of tradeoffs are to
maximize the firm's economic value creation and profit margin]

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 Ch6BUS498: Business Strategy: Differentiation, Cost Leadership, and
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What are the important types of business-level strategies?
Differentiation Strategy
Drivers that can increase value in the differentiation strategy:
Three Salient Drivers of Differentiation strategy:
A value driver contributes to competitive advantage only of its
increase in value creation exceeds the increase in costs
How do complements help on differentiation strategy?
Cost Leadership Strategy
Drivers that help keep costs low in Cost Leadership
Economies of Scale (but careful about diseconomies of scale)
drives down costs
Differentiation Strategy, Cost Leadership Strategy, both in the case
of Blue Ocean Strategy, Focused strategies
This strategy focuses on increasing value of goods and services,
Consumers are willing to pay a higher price, Competitive advan- tage
achieved when: (Value - Cost > competition)
Almost anything can be a base of differentiation (A value driver
contributes to competitive advantage only if its increase in value
creation exceeds the increase in costs)
Product features, Customer features, Complements
Key of competitive advantage: Your economic value (total V - total C)
> competitor's
Increases perceived value Consumed in tandem, (Example: AT&T U-
verse, Bundles Internet access, phone, and TV services)
This strategy concentrates on reducing the focal firm's costs below
those of its competitors
Cost of input factors, Economies of Scale Learning-
curve effects, Experience curve effects
Decreases in per unit costs as output increases
Learning
It takes
more less time to produce the same output, We learn how to be
efficient.

People learn from cumulative experience Cumulative output

When technology is changed while output is constant (Examples: A new
Experience curve effects
production process, Implementing lean manufacturing)

What are the benefits & risks of differentiation and cost leadership How well the strategy (Leverages the firm's internal strengths &
strategies? The success of business strategy relies on: Mitigates its weaknesses) and how well it helps the firm (Exploit
external opportunities, Avoid external threats)
Can a firm pursue both differentiation and cost leadership simul-
taneously? negative Use of structure, management control, and compensation policies are
nearly opposites—No
Can a firm pursue both differentiation and cost leadership simul-
taneously? positive
Yes: Blue Ocean strategy (Integration)
Successfully combining differentiation and cost-leadership activi- ties,
Blue ocean strategy: Uses value innovation to reconcile trade-offs
Untapped market space, The creation of additional demand, The
The metaphor of blue ocean means:
opportunity for highly profitable growth
Trade-offs of Southwest Airlines Example of Blue Ocean Strategy Lowering
costs eliminates The factors that the industry takes for granted
the factors that should be moved well below the industry's stan-
Lowering costs Reduces
dard
the factors should be moved well above the industry's standard and
Lowering cost Raises
increases perceived consumer benefits
Lowering costs Creates factors that should be made that the industry has never offered?
The value curve and the strategy canvas reflect a company's strategic profile
Horizontal connection points, Located on the strategy canvas, Helps
The Value Curve
strategists determine courses of action
Graphical depiction of a company's performance, Relative to its
The Strategy Canvas
competitors, Viewed across the industry's key success factors
Quality: Can increase perceived value and lower cost for produc- tion
and after-sale service
Factors contributing to both low cost & differentiation
- Economies of Scope: Starbucks adding hot tea to its menu
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 Ch6BUS498: Business Strategy: Differentiation, Cost Leadership, and
Oceans
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_39743g - Innovation: IKEA - stylish furniture in flat pack delivery

- Structure, Culture, & Routines: Lean manufacturing system, JIT

Focused strategies
Focused strategies specifically
Focus on specific, smaller segments (or niches) of customers rather
than the entire market
Why would firms choose to follow a focused strategy?
What are the implications of Focused Strategy?
Because Only a Handful of Strategic Options Are Available
system, TOMS
A special way to implement cost leadership and differentiation
strategy:
Focus on specific, smaller segments (or niches) of customers rather
than the entire market
Focused cost leadership strategy, or Focused differentiation strat- egy
Scope: geographic, segment & products, type of customers
Only a Handful of Strategic Options Are Available: Low cost or
differentiation, Broad or narrow, Blue ocean
So managers must Understand firm and industry effects, Fine-tune
strategy formulation and execution, And be creative

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