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Chapter 4

Business-Level Strategy

Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
2000 South-Western College Publishing

Ch4-1

Strategic
Inputs

Chapter 2
External
Environment

Strategic Intent
Strategic Mission

Chapter 3
Internal
Environment

Strategy Implementation

Chapter 4
Business-Level
Strategy

Chapter 5
Competitive
Dynamics

Chapter 6
Corporate-Level
Strategy

Chapter 10
Corporate
Governance

Chapter 11
Structure
& Control

Chapter 7
Acquisitions &
Restructuring

Chapter 8
International
Strategy

Chapter 9
Cooperative
Strategies

Chapter 12
Strategic
Leadership

Chapter 13

Outcomes

Strategic

Strategic
Actions

Strategy Formulation

The Strategic
Management
Process

Feedback

Entrepreneurship

& Innovation

Strategic
Competitiveness
Above Average
Returns
Ch4-2

Chapter 2

External Environment

Chapter 3

Sustainable
Competitive
Advantage

Internal Environment

Chapter 4
Business Level
Strategy
Ch4-3

Core
Competenc
y

The resources and capabilities


that have been determined to
be a source of competitive
advantage for a firm over its
rivals.

Ch4-4

Core
Competency

Strateg
y

The resources and capabilities that have been


determined to be a source of competitive
advantage for a firm over its rivals.

An integrated and coordinated


set of actions taken to exploit
core competencies and gain a
competitive advantage.

Ch4-5

Core
Competency

Strategy

Business
Level
Strategy

The resources and capabilities that have been


determined to be a source of competitive
advantage for a firm over its rivals.

An integrated and coordinated set of


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

Actions taken to provide value to


customers and gain a competitive
advantage by exploiting core
competencies in specific,
individual product markets.

Ch4-6

Basis for Customer Segmentation


Consumer Markets
1. Demographic factors (age, income, sex, etc.)
2. Socioeconomic factors
(social class, stage in the family life cycle)
3. Geographic factors
(culture, region or country differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns
(heavy, moderate, and light users)
6. Perceptual factors
(benefit segmentation, perceptual mapping)
7. Brand loyalty patterns
Ch4-7

Basis for Customer Segmentation


Industrial Markets
1. End use segments (identified by SIC code)
2. Product segments (based on technological differences
or production economics)
3. Geographic segments (defined by boundaries
between countries or by regional differences within
them)
4. Common buying factor segments (cut across
product/market and geographic segments)
5. Customer size segments
Ch4-8

Generic Business Level Strategies


Source of Competitive Advantage

Breadth of
Competitive
Scope

Broad
Target
Market

Narrow
Target
Market

Cost

Uniqueness

Cost
Leadership

Differentiation

Focused
Low Cost

Focused
Differentiation
Ch4-9

Cost Leadership Business Level Strategy


Key Criteria:
Relatively standardized products
Features acceptable to many customers
Lowest competitive price
Ch4-10

Cost Leadership Business Level Strategy


Requirements:
Constant effort to reduce costs through:
Building efficient scale facilities
Tight control of production costs and overhead
Minimizing costs of sales, R&D and service
State of the art manufacturing facilities
Monitoring costs of activities provided by outsiders
Simplification of processes
Ch4-11

Value Creating Activities Common to a


Cost Leadership Business Level Strategy
Human Resource Management
Technological Development

M
A
R

G
IN

Primary Activities

M Service
A
R
G
IN

Marketing
& Sales

Outbound
Logistics

Operations

Procurement
Inbound
Logistics

Support
Activities

Firm Infrastructure

Ch4-12

Value Creating Activities Common to a


Cost Leadership Business Level Strategy
Simplified Planning
Practices to Reduce
Planning Costs

Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure

Consistent Policies to
Reduce Turnover Costs

Effective Training Programs


to Improve Worker
Efficiency and Effectiveness

Easy-to-Use Manufacturing
Technologies

Investments in Technology in order


to Reduce Costs Associated with
Manufacturing Processes

Human Resource Management


Technological Development

M
A
R

G
IN

Systems and Procedures to find the


Lowest Cost Products to Purchase
Raw Materials

Frequent Evaluation Processes to


Procurement
Monitor Suppliers Performances

Policy Choice of Efficient Order


Plant Technology Sizes

National Scale
Advertising

M Service
A
R
G
IN

Located in Close
Proximity with
Suppliers

Organizational
Learning

Effective Product
Installations to
Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume

Marketing
& Sales

Small, Highly
Trained Sales
Force

Outbound
Logistics

Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Operations

Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

Interrelationships
with Sister Units

Primary Activities

Ch4-13

Value Creating Activities Common to a


Inbound
Cost Leadership
Business
Level
Strategy
Logistics
Simplified Planning
Practices to Reduce
Planning Costs

Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure
Highly Efficient

Systems
to Link
Effective Training Programs
toManagement
Improve Worker
Human Resource
Suppliers
Efficiency and Effectiveness
Products with the
Easy-to-Use Manufacturing
Investments in Technology in order
Firms
Production
Technologies
to Reduce
Costs Associated with
Technological Development
Manufacturing Processes
Processes

Consistent Policies to
Reduce Turnover Costs

Systems and Procedures to find the


Lowest Cost Products to Purchase
Raw Materials

M
A
R

G
IN

Frequent Evaluation Processes to


Procurement
Monitorin
Suppliers
Located
ClosePerformances

Proximity with
Small, Highly
Sales
Suppliers Trained
Force

Policy Choice of Efficient Order


Plant Technology Sizes

National Scale
Advertising

Organizational
Learning

M Service
A
R
G
IN

Located in Close
Proximity with
Suppliers

Marketing
& Sales

Effective Product
Installations to
Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume

Outbound
Logistics

Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Operations

Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes

Inbound
Inbound
Logistics
Logistics

Support
Activities

Cost Effective
MIS Systems

Interrelationships
with Sister Units

Primary Activities

Ch4-14

Value Creating Activities Common to a


Operations
Cost Leadership Business Level Strategy
Firm

Relatively Few
Management Layers to
Reduce Overhead

M
Human Resource Management
Timing of Asset A
R
Easy-to-Use Manufacturing
Investments inPurchases
Technology in order
G
Technologies
to Reduce Costs Associated with
Technological Development
IN
Manufacturing Processes
Effective Training Programs
to Improve Worker
Efficiency and Effectiveness

Consistent Policies to
Reduce Turnover Costs

Policy Choice of
Systems and Procedures to find the
Frequent Evaluation
to
PlantProcesses
Technology
Lowest Cost Products toProcurement
Purchase
Monitor Suppliers Performances

Policy Choice of Efficient Order


Plant Technology Sizes
Organizational
Learning

Organizational
Small, Highly
Effective Product
Trained Sales
Installations to
Learning
Force

M Service
A
R
G
IN

Located in Close
Proximity with
Suppliers

Outbound
Logistics

Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Operations

Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes

Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume

Marketing
& Sales

Raw Materials

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

Efficient Plant
Scale to Minimize
Infrastructure
Mfg. Costs

Simplified Planning
Practices to Reduce
Planning Costs

National Scale
Advertising

Interrelationships
with Sister Units

Primary Activities

Ch4-15

Value Creating Activities Common to a


Outbound
Cost Leadership Business Level
Strategy
Logistics
Simplified Planning
Practices to Reduce
Planning Costs

Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure

Delivery Schedule
that Reduces Costs

M
Human Resource ManagementSelection
A of Low
R
Easy-to-Use Manufacturing
Investments in Technology in order
Cost Transport
G
Technologies
to Reduce Costs Associated with
Technological Development
IN
Carriers
Manufacturing Processes
Systems and Procedures to find the
Efficient Order
Frequent Evaluation Processes to
Lowest Cost Products toProcurement
Purchase
Monitor Suppliers Performances
Sizes
Raw Materials

Located in Close
Proximity with
Suppliers

Policy Choice of Efficient Order


Plant Technology Sizes

National Scale
Advertising

Organizational
Learning

Marketing
& Sales

Small, Highly
Trained Sales
Force

Outbound
Outbound
Logistics
Logistics

Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Operations

Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes

Effective Product
Interrelationships
Installations to
Reduce
Frequency
with
Sister
Units

M Service
A
R
G
IN

Effective Training Programs


to Improve Worker
Efficiency and Effectiveness

Consistent Policies to
Reduce Turnover Costs

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

and Severity
Products Priced to of Recalls
Generate Sales
Volume

Interrelationships
with Sister Units

Primary Activities

Ch4-16

Value Creating Activities Common to a


Marketing
Cost Leadership Business Level Strategy
& Sales
Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure

Effective Training Programs


to Improve Worker
Efficiency and Effectiveness

Easy-to-Use Manufacturing
Technologies

Investments in Technology in order


to Reduce Costs Associated with
Manufacturing Processes

Human Resource Management


Technological Development

Systems and Procedures to find the


Lowest Cost Products to Purchase
Raw Materials

Frequent Evaluation Processes to


Procurement
Monitor Suppliers Performances

Located in Close
Proximity with
Suppliers

Policy Choice of Efficient Order


Plant Technology Sizes

National Scale
Advertising

Organizational
Learning

Products
Priced
A
R
to Generate
Sales
G
Volume I

National Scale
Advertising

Effective Product
Installations to
Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume

Marketing
&
& Sales
Sales

Small, Highly
Trained Sales
Force

Outbound
Logistics

Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Operations

Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes

Small, Highly
Trained Sales Force

M Service
A
R
G
IN

Simplified Planning
Practices to Reduce
Planning Costs

Consistent Policies to
Reduce Turnover Costs

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

Interrelationships
with Sister Units

Primary Activities

Ch4-17

Value Creating Activities Common to a


Cost Leadership Business Level Strategy
Simplified Planning
Practices to Reduce
Planning Costs

Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure

Service

Effective Product
Effective Training ProgramsInstallations to
Consistent Policies to
M
Improve Worker
Human
ResourcetoEfficiency
Management
Reduce
Turnover Costs
Reduce
and Effectiveness
A
R
Recalls
Easy-to-Use Manufacturing
Investments in Technology in
order
G
to Reduce Costs Associated with
Technological Development
Manufacturing Processes

IN

Technologies

Systems and Procedures to find the


Lowest Cost Products to Purchase
Raw Materials

Frequent Evaluation Processes to


Procurement
Monitor Suppliers Performances

Policy Choice of Efficient Order


Plant Technology Sizes

National Scale
Advertising

Service
M Service
A
R
G
IN

Located in Close
Proximity with
Suppliers

Organizational
Learning

Effective Product
Installations to
Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume

Marketing
& Sales

Small, Highly
Trained Sales
Force

Outbound
Logistics

Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Operations

Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

Interrelationships
with Sister Units

Primary Activities

Ch4-18

Value Creating Activities Common to a


Cost Leadership Business Level Strategy
Simplified Planning
Practices to Reduce
Planning Costs

Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure

Consistent Policies to
Reduce Turnover Costs

Effective Training Programs


to Improve Worker
Efficiency and Effectiveness

Easy-to-Use Manufacturing
Technologies

Investments in Technology in order


to Reduce Costs Associated with
Manufacturing Processes

Human Resource Management


Technological Development

M
A
R

G
IN

Systems and Procedures to find the


Lowest Cost Products to Purchase
Raw Materials

Frequent Evaluation Processes to


Procurement
Monitor Suppliers Performances
Procurement
Effective Product
Installations to
Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume

Procurement

Systems and Procedures to Find


Located in Close Policy Choice of Efficient Order
theProximity
Lowest
to
PlantProducts
Technology Sizes
with Cost
Suppliers
Purchase
Raw Materials
Organizational
Learning

Interrelationships
with Sister Units

Primary Activities

M Service
A
R
G
IN

Small, Highly
Trained Sales
Force

Marketing
& Sales

Outbound
Logistics

Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Operations

Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

Frequent Evaluation
Processes to Monitor
Suppliers Performances

National Scale
Advertising

Ch4-19

Value Creating Activities Common to a


Cost Leadership Business Level Strategy
Simplified Planning
Practices to Reduce
Planning Costs

Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure

Consistent Policies to
Reduce Turnover Costs

Effective Training Programs


to Improve Worker
Efficiency and Effectiveness

Easy-to-Use Manufacturing
Technologies

Investments in Technology in order


to Reduce Costs Associated with
Manufacturing Processes

Human Resource Management


Technological Development

M
A
R

G
IN

Systems and Procedures to find the


Lowest Cost Products to Purchase
Raw Materials

Frequent Evaluation Processes to


Procurement
Monitor Suppliers Performances

Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Small, Highly
Trained Sales
Force

Effective Product
Installations to
Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume

Located in Close
Proximity with
Suppliers

Policy Choice of Efficient Order


Plant Technology Sizes

National Scale
Advertising

Organizational
Learning

Marketing
& Sales

Outbound
Logistics

Easy-to-Use
Manufacturing
Technologies

Operations

Technological Development

M Service
A
R
G
IN

Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

Investments in Technology in
order to Reduce Costs Associated
with Manufacturing Processes

Interrelationships
with Sister Units

Primary Activities

Ch4-20

Value Creating Activities Common to a


Cost Leadership Business Level Strategy
Simplified Planning
Practices to Reduce
Planning Costs

Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure

Consistent Policies to
Reduce Turnover Costs

Effective Training Programs


to Improve Worker
Efficiency and Effectiveness

Easy-to-Use Manufacturing
Technologies

Investments in Technology in order


to Reduce Costs Associated with
Manufacturing Processes

Human Resource Management


Technological Development

M
A
R

G
IN

Human Procurement
Resource Management

Located in Close
Proximity with
Suppliers

Cost Transport
Carriers

Generate Sales
Volume

Policy Choice of Efficient Order


Plant Technology Sizes

National Scale
Advertising

Organizational
Learning

M Service
A
R
G
IN

Products with the Costs


Firms Production
Timing of Asset
Processes
Purchases

Effective Product
Effective Training Programs
Installations to
to Improve Worker Reduce Frequency
and Severity
Efficiency and Effectiveness
Selection of Low Products Priced to of Recalls
Delivery Schedule Small, Highly
that Reduces
Trained Sales
Costs
Force

Marketing
& Sales

Operations

Highly Efficient
Efficientto
Plant
Consistent
Policies
Systems to Link
Scale to Minimize
Reduce
Costs
SuppliersTurnover
Manufacturing

Frequent Evaluation Processes to


Monitor Suppliers Performances

Outbound
Logistics

Systems and Procedures to find the


Lowest Cost Products to Purchase
Raw Materials

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

Interrelationships
with Sister Units

Primary Activities

Ch4-21

Value Creating Activities Common to a


Cost Leadership Business Level Strategy
Simplified Planning
Practices to Reduce
Planning Costs

Relatively Few
Management Layers to
Reduce Overhead

Firm Infrastructure

Consistent Policies to
Reduce Turnover Costs

Effective Training Programs


to Improve Worker
Efficiency and Effectiveness

Easy-to-Use Manufacturing
Technologies

Investments in Technology in order


to Reduce Costs Associated with
Manufacturing Processes

Human Resource Management


Technological
Development
Firm Infrastructure

M
A
R

G
IN

Located in Close
Proximity with
Suppliers

Policy Choice of Efficient Order


Plant Technology Sizes

National Scale
Advertising

Organizational
Learning

Installations to
Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume

Marketing
& Sales

Trained Sales
Force

Outbound
Logistics

Scale to Minimize that Reduces


Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers

Operations

Systems to Link
Suppliers
Products with the
Firms Production
Processes

M Service
A
R
G
IN

CostSystems
Effective
Simplified
Planning
Relatively Few
and Procedures to find
the
Frequent Evaluation Processes to
Cost Products toProcurement
Purchase
Suppliers Performances
MIS Lowest
Systems
Practices Monitor
to Reduce
Management Layers
Raw Materials
Planning
Costs
Overhead
Highly Efficient
Efficient Plant
Delivery
Schedule Small, Highly to Reduce
Effective Product

Inbound
Logistics

Support
Activities

Cost Effective
MIS Systems

Interrelationships
with Sister Units

Primary Activities

Ch4-22

How to Obtain a Cost Advantage


1. Determine and Control Cost Drivers
2. Reconfigure the Value Chain as needed
Alter production process
Change in automation
New distribution channel
New advertising media
Direct sales in place of
indirect sales

New raw material


Forward integration
Backward integration
Change location relative
to suppliers or buyers

Ch4-23

Reconfiguring the Value Chain


of Iowa Beef Packers (IBP)
Old
Way:

New
New
Way:
Way

Ranch
Cattle

Ship on the
Hoof to Rail
Center
(Chicago)

Locate large
automated
plants near
ranches

Slaughter
into sides
of beef

Process into
Boxed Cuts at
plants

Boxed
Cuts at
Markets

Ship cuts
already
Boxed to
Markets

Save on shipping and cattle weight loss


Utilize cheaper non-union rural labor
Ch4-24

Choices That Drive Costs


Economies of scale

Product features

Asset utilization

Performance

Capacity utilization pattern


- Seasonal, cyclical

Mix & variety of products

Interrelationships
- Order processing
and distribution

Small vs. large buyers

Value chain linkages


- Advertising & Sales
- Logistics & Operations

Wage levels

Service levels
Process technology
Product features
Hiring, training, motivation
Ch4-25

Three Key Questions


1. How can an activity be performed
differently or even eliminated?
2. How can a group of linked value
activities be regrouped or reordered?
3. How might coalitions with other
firms lower or eliminate costs?
Gallo sold wine through grocery stores rather than liquor
stores because they were more efficient distributors
Ch4-26

Effective Cost Leaders can remain


profitable even when the
Five Forces appear unattractive

Ch4-27

Effective Cost Leaders can remain profitable even when


the Five Forces appear unattractive
Threat of
New
Entrants

Can frighten off New Entrants


due to the need to:
* Enter at large scale to
be Cost Competitive
* Take time to move down
the Learning Curve
Ch4-28

Effective Cost Leaders can remain profitable even when


the Five Forces appear unattractive
Threat of
New
Entrants

Can frighten off New Entrants due


to the need to:
* Enter at Large Scale to be
Cost Competitive
* Take time to move down the
Learning Curve

Can mitigate Buyer Power by:


* Driving prices far below competitors
may cause exit and shift power back
to firm

Bargaining
Power of
Buyers

Ch4-29

Effective Cost Leaders can remain profitable even when


the Five Forces appear unattractive
of
Well positioned relative toThreat
New
Substitutes in order to: Entrants
* Make investments to create

substitutes first
* Buy patents developed by
potential substitutes

* Lower prices to maintain


value position

Can frighten off New Entrants due


to the need to:
* Enter at Large Scale to be
Cost Competitive
* Take time to move down the
Learning Curve

Bargaining
Power of
Buyers
Can mitigate Buyer Power by:

Threat of
Substitute
Products

Driving prices far below


competitors which may
cause exit and shift power
back to firm
Ch4-30

Effective Cost Leaders can remain profitable even when


the Five Forces appear unattractive

Bargaining
Power of
Suppliers

Threat of
New
Entrants

Can frighten off New Entrants due


to the need to:
* Enter at Large Scale to be
Cost Competitive
* Take time to move down the
Learning Curve

Can mitigate Supplier Power by:

Bargaining
Power of
Buyers

* Low cost position makes them better


able torelative
absorb
cost increases
Well positioned
to
Can mitigate Buyer Power by:
Substitutes in order to:

Driving prices far below


large purchases
* More likely to make very
Threat of
competitors which may
Can
buy
patents
developed
by
*
which
reduces
chance
of
supplier
power
cause exit and shift power
Substitute
potential substitutes
* Make investments to create substitutes

* Lower prices to maintain


value position

Products

back to firm

Ch4-31

Effective Cost Leaders can remain profitable even when


Competitors avoid
the Five Forces appear unattractive
price wars with Cost
Leaders,
Can mitigate Supplier Power by:
Can frighten offwhich
New Entrants due
Threat of
to the need to:
creates
higher
profits
* Low cost position makes them
Enter
at
Large
Scale
to
be
New
*
better able to absorb cost increases
Cost
Competitive
for
entire
industry
Entrants
* More likely to make very large
* Take time to move down the
Learning Curve

purchases which reduces chance


of supplier power

Bargaining
Power of
Suppliers

Rivalry Among
Competing Firms
in Industry

Well positioned relative to


Substitutes in order to:
* Make investments to create substitutes
* Can buy patents developed by
potential substitutes
* Lower prices to maintain
value position

Bargaining
Power of
Buyers
Can mitigate Buyer Power by:

Threat of
Substitute
Products

Driving prices far below


competitors which may
cause exit and shift power
back to firm
Ch4-32

Major Risks of Cost Leadership


Business Level 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
Ch4-33

Generic Business Level Strategies


Source of Competitive Advantage
Cost

Breadth of
Competitive
Scope

Broad
Target
Market

Uniqueness

Cost
Leadership

Narrow
Target
Market
Ch4-34

Generic Business Level Strategies


Source of Competitive Advantage

Breadth of
Competitive
Scope

Broad
Target
Market

Cost

Uniqueness

Cost
Leadership

Differentiation

Narrow
Target
Market
Ch4-35

Differentiation Business Level Strategy


Key Criteria:
Value provided by unique features
and value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation
Ch4-36

Differentiation Business Level Strategy


Requirements:
Constant effort to differentiate products through:
Developing new systems and processes
Shaping perceptions through advertising
Quality focus
Capability in R&D
Maximize Human Resource contributions
through low turnover and high motivation
Ch4-37

Value Creating Activities Common to a


Differentiation Business Level Strategy
Human Resource Management
Technological Development

M
A
R

G
IN

Primary Activities

M Service
A
R
G
IN

Marketing
& Sales

Outbound
Logistics

Operations

Procurement
Inbound
Logistics

Support
Activities

Firm Infrastructure

Ch4-38

Value Creating Activities Common to a


Differentiation Business Level Strategy
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

Compensation programs
intended to encourage worker
creativity and productivity

Extensive use of subjective


rather than objective
performance measures

Superior
personnel
training

Coordination among R&D,


product development and
marketing

Investments in technologies that will


allow the firm to consistently produce
highly differentiated products

Human Resource Management


Technological Development

Systems and procedures used to find


the highest quality raw materials

M
A
R
Strong
capability in
basic research

G
IN

Purchase of highest quality

Procurement
replacement parts

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Primary Activities

Marketing
& Sales

Rapid responses
to customers
unique
manufacturing
specifications

Outbound
Logistics

Accurate and
responsive order
processing
procedures

M Service
A
R
G
IN

Strong Coordin- Complete field


ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Consistent
manufacturing of
attractive
products

Operations

Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

Inbound
Logistics

Support
Activities

Firm Infrastructure

Premium
Pricing

Ch4-39

Value Creating Activities Common to a


Inbound
Differentiation
Business
Level
Strategy
Logistics
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

of incoming raw
Superior
personnel
M
materials
to
Human Resource
Management
training
A
minimize
damage
R
Coordination among R&D,
Investments in technologies that will
Strong
andthe
improve
the produce capability in GI
product
development and
allow
firm to consistently
Technological
Development
marketing
highly differentiated products
basic research
N
quality of the
Systems and procedures used to find
Purchase of highest quality
final product
the highest quality rawProcurement
materials
replacement parts
Strong Coordin- Complete field
ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Rapid responses
to customers
unique
manufacturing
specifications

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Primary Activities

Marketing
& Sales

Accurate and
responsive order
processing
procedures

Outbound
Logistics

Consistent
manufacturing of
attractive
products

Operations

Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

Extensive use of subjective


rather than objective
performance measures

M Service
A
R
G
IN

Compensation programs
intended to encourage worker
creativity and productivity

Inbound
Inbound
Logistics
Logistics

Support
Activities

Firm Infrastructure
Superior handling

Premium
Pricing

Ch4-40

Value Creating Activities Common to a


Operations
Differentiation Business
Level Strategy
Consistent
manufacturing of
Infrastructure
attractiveSuperior
products
Extensive use of subjective

Highly Developed Information


Systems to better understand
customers purchasing preferences
Compensation programs
intended to encourage worker
creativity and productivity

rather than objective


personnel
M
Human Resource
Management
performance measures
training
Rapid responses to AR
Coordination among R&D,
Investments in technologies that will
Strong
G
customers
unique
product
development and
allow the
firm to consistently produce
capability in
Technological
Development
IN
marketing
highly differentiated manufacturing
products
basic research
Systems and procedures used to find
the highest quality raw materials

specifications

Purchase of highest quality

Procurement
replacement parts

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Primary Activities

Marketing
& Sales

Rapid responses
to customers
unique
manufacturing
specifications

Outbound
Logistics

Accurate and
responsive order
processing
procedures

M Service
A
R
G
IN

Strong Coordin- Complete field


ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Consistent
manufacturing of
attractive
products

Operations

Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

Inbound
Logistics

Support
Activities

Firm

A companywide
emphasis on producing
high quality products

Premium
Pricing

Ch4-41

Value Creating Activities Common to a


Outbound
Differentiation Business Level
Strategy
Logistics
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

Accurate and
responsive order
Compensation programs
Extensive use of subjective
Superior
intended to encourage worker rather than objective
personnel
M
processing
Human
Resource
Management
creativity and productivity
performance measures
training
A
procedures
R
Coordination among R&D,
Investments in technologies that will
Strong
allow the
firm to consistently produce
Technological
Development
highly differentiated products

product development and


marketing

Purchase of highest quality

Procurement
replacement parts

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Marketing
& Sales

Rapid responses
to customers
unique
manufacturing
specifications

Outbound
Outbound
Logistics
Logistics

Accurate and
responsive order
processing
procedures

Primary Activities

G
IN

Rapid and timely


product deliveries
to customers

Strong Coordin- Complete field


ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Consistent
manufacturing of
attractive
products

Operations

Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

capability in
basic research

M Service
A
R
G
IN

Systems and procedures used to find


the highest quality raw materials

Inbound
Logistics

Support
Activities

Firm Infrastructure

Premium
Pricing

Ch4-42

Value Creating Activities Common to a


Marketing
Differentiation Business Level Strategy
& Sales
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

Strong Coordination
among functions in
Compensation programs
Extensive use of subjective
Superior
Marketing
intended to encourage worker rather than objective
personnel R&D,
M
Human
Resource
Management
creativity and productivity
performance measures
training
andAProduct
R
Coordination among R&D,
Investments in technologies that will
Strong
Development
G
product development and
allow the firm to consistently produce
capability in

Technological
Development
highly differentiated products

marketing

Purchase of highest quality

Procurement
replacement parts

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Marketing
&
& Sales
Sales

Rapid responses
to customers
unique
manufacturing
specifications

Outbound
Logistics

Accurate and
responsive order
processing
procedures

Primary Activities

IN

Extensive personal
relationships with
buyers

Strong Coordin- Complete field


ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Consistent
manufacturing of
attractive
products

Operations

Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

basic research

M Service
A
R
G
IN

Systems and procedures used to find


the highest quality raw materials

Inbound
Logistics

Support
Activities

Firm Infrastructure

Premium
Pricing

Premium
Pricing

Ch4-43

Value Creating Activities Common to a


Differentiation Business Level Strategy
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

Service

Complete field
Compensation programs
Extensive use of subjective
Superior
stocking of
intended to encourage worker rather than objective
personnel
M
Human Resource
Management
replacement
creativity and productivity
performance measures
training
A
R
Coordination among R&D,
Investments in technologies that willparts
Strong
allow the
firm to consistently produce
Technological
Development
highly differentiated products

product development and


marketing

Systems and procedures used to find


the highest quality raw materials

capability in
basic research

G
IN

Purchase of highest quality

Procurement
replacement parts

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Primary Activities

Marketing
& Sales

Rapid responses
to customers
unique
manufacturing
specifications

Outbound
Logistics

Accurate and
responsive order
processing
procedures

Service
M Service
A
R
G
IN

Strong Coordin- Complete field


ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Consistent
manufacturing of
attractive
products

Operations

Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

Inbound
Logistics

Support
Activities

Firm Infrastructure

Premium
Pricing

Ch4-44

Value Creating Activities Common to a


Differentiation Business Level Strategy
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

Support
Activities

Firm Infrastructure

Compensation programs
intended to encourage worker
creativity and productivity

Extensive use of subjective


rather than objective
performance measures

Superior
personnel
training

Coordination among R&D,


product development and
marketing

Investments in technologies that will


allow the firm to consistently produce
highly differentiated products

Human Resource Management


Technological Development

Systems and procedures used to find


the highest quality raw materials

M
A
R
Strong
capability in
basic research

G
IN

Purchase of highest quality

Procurement
replacement parts
Procurement

Procurement

Rapid responses
to customers
unique
manufacturing
specifications

Systems and procedures


used to find the highest
quality raw materials

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Purchase of highest
quality replacement
parts
Premium

M Service
A
R
G
IN

Strong Coordin- Complete field


ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Marketing
& Sales

Accurate and
responsive order
processing
procedures

Outbound
Logistics

Consistent
manufacturing of
attractive
products

Operations

Inbound
Logistics

Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

Located in
Close Proximity
with Suppliers

Pricing

Primary Activities

Ch4-45

Value Creating Activities Common to a


Differentiation Business Level Strategy
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

Compensation programs
intended to encourage worker
creativity and productivity

Extensive use of subjective


rather than objective
performance measures

Superior
personnel
training

Coordination among R&D,


product development and
marketing

Investments in technologies that will


allow the firm to consistently produce
highly differentiated products

Human Resource Management


Technological Development

Systems and procedures used to find


the highest quality raw materials

M
A
R
Strong
capability in
basic research

G
IN

Purchase of highest quality

Procurement
replacement parts

Strong Coordin- Complete field


ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Consistent
manufacturing of
attractive
products

Accurate and
responsive order
processing
procedures

unique
manufacturing
specifications

product deliveries relationships


to customers
with buyers

Marketing
& Sales

Outbound
Logistics

Operations

Technological Development

Coordination among
Investments in technolR&D, marketing and
ogies to produce highly
Rapid responses
Extensive
product development
differentiated
products
Rapid
and
timely
personal
to customers

Primary Activities

M Service
A
R
G
IN

Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

Inbound
Logistics

Support
Activities

Firm Infrastructure

Strong
capability in
basic research

Premium
Pricing

Ch4-46

Value Creating Activities Common to a


Differentiation Business Level Strategy
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

Support
Activities

Firm Infrastructure

Compensation programs
intended to encourage worker
creativity and productivity

Extensive use of subjective


rather than objective
performance measures

Superior
personnel
training

Coordination among R&D,


product development and
marketing

Investments in technologies that will


allow the firm to consistently produce
highly differentiated products

Human Resource Management


Technological Development

M
A
R
Strong
capability in
basic research

G
IN

Human Procurement
Resource Management
Product
Development

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Primary Activities

M Service
A
R
G
IN

Rapid responses
to customers
unique
manufacturing
specifications

ExtensiveStrong
useCoordinof
Superior
Complete field
among
stocking ofpersonnel
subjectiveation
performance
functions in R&D, replacement parts
measuresMarketing and
training

Accurate and
responsive order
processing
procedures

Marketing
& Sales

minimize
damage and
improve the
quality of the
final product

Operations

Inbound
Logistics

Compensation
programs
Superior
Consistent
handling
of
manufacturing
of
which
encourage
worker
incoming raw
attractive
products
materials and
to
creativity
productivity

Purchase of highest quality


replacement parts

Outbound
Logistics

Systems and procedures used to find


the highest quality raw materials

Premium
Pricing

Ch4-47

Value Creating Activities Common to a


Differentiation Business Level Strategy
Highly Developed Information
Systems to better understand
customers purchasing preferences

A companywide
emphasis on producing
high quality products

Compensation programs
intended to encourage worker
creativity and productivity

Extensive use of subjective


rather than objective
performance measures

Superior
personnel
training

Coordination among R&D,


product development and
marketing

Investments in technologies that will


allow the firm to consistently produce
highly differentiated products

Human Resource Management


Technological
Development
Firm Infrastructure

M
A
R
Strong
capability in
basic research

G
IN

ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development

Marketing
& Sales

Rapid responses
to customers
unique
manufacturing
specifications

Outbound
Logistics

manufacturing of responsive order


attractive
processing
products
procedures

Operations

handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers

Primary Activities

M Service
A
R
G
IN

Highly
developed InformationPurchase of highest
A companywide
emphasis
Systems and procedures used to find
quality
the highest
rawProcurement
materials
replacement parts
Systems
toquality
better
understand
on producing high quality
customers
purchasing
preferences
products
Strong
Coordin- Complete field
Consistent
Accurate and
Superior

Inbound
Logistics

Support
Activities

Firm Infrastructure

Premium
Pricing

Ch4-48

Differentiation Business Level Strategy


Effectiveness with Differentiation
grows out of Value Chain activities
Examples:

Heineken beer

Raw materials

Steinway pianos

Raw materials & Workmanship

Mercedes Benz autos

Technology and Workmanship

Intel microprocessors

Technological superiority

Caterpillar tractors

Service buyers needs quickly


anywhere in the world
Ch4-49

Create Value with Differentiation by:


Lowering Buyers Costs
Raising Buyers Performance
Creating Sustainability through:
Creating barriers by perceptions of uniqueness
Creating switching costs through differentiation

Ch4-50

Drivers of Differentiation
Examples:

Unique product features


Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
Ch4-51

Effective Differentiators can remain


profitable even when the
Five Forces appear unattractive

Ch4-52

Effective Differentiators can remain profitable


even when the Five Forces appear unattractive
Threat of
New
Entrants

Can fend off New Entrants


because:
* New products must
surpass proven products
* Or be equal to performance
at lower prices
Ch4-53

Effective Differentiators can remain profitable


even when the Five Forces appear unattractive
Threat of
New
Entrants

Can fend off New Entrants because:


*

New products must


surpass proven products

Or be equal to performance
at lower prices

Can mitigate Buyer Power because:


Well differentiated products reduce
customer sensitivity to price increases

Bargaining
Power of
Buyers

Ch4-54

Effective Differentiators can remain profitable


even when the Five Forces appear unattractive
Threat of
New
Entrants

Well positioned relative to


Substitutes because:
* Brand loyalty tends to
reduce new product trial
and brand switching
Threat of
Substitute
Products

Can fend off New Entrants because:


*

New products must


surpass proven products

Or be equal to performance
at lower prices

Bargaining
Power of
Suppliers

Can mitigate Buyer Power


because well differentiated
products reduce customer
sensitivity to price increases
Ch4-55

Effective Differentiators can remain profitable


even when the Five Forces appear unattractive
Threat of
New
Entrants

Bargaining
Power of
Suppliers

Can fend off New Entrants because:


*

New products must


surpass proven products

Or be equal to performance
at lower prices

Can mitigate Supplier Power by:

to
* Absorbing price increases dueBargaining
Power of
higher margins

Well positioned relative to


Substitutes because:

Suppliers

* Passing on higher supplier prices


loyalty tends
to
* Brand
because
buyers
are brand loyal
reduce new product trial and
brand switching

Threat of
Substitute
Products

Can mitigate Buyer Power


because well differentiated
products reduce customer
sensitivity to price increases
Ch4-56

Effective Differentiators can remain profitable


even when the Five Forces appear unattractive
Can mitigate Supplier Power by:
*
*

Absorbing price increases


due to higher margins
Passing on higher supplier prices
because buyers are brand loyal

Bargaining
Power of
Buyers
Well positioned relative to
Substitutes because:
*

Brand loyalty tends to


reduce new product trial and
brand switching

Threat of
New
Entrants

Can fend off New Entrants because:

Brand
loyalty
New products must
surpass proven products
overcomes
much
* Or be equal to performance
price
competition
at lower
prices
*

Rivalry Among
Competing Firms
in Industry

Threat of
Substitute
Products

Bargaining
Power of
Suppliers

Can mitigate Buyer Power


because well differentiated
products reduce customer
sensitivity to price increases
Ch4-57

Major Risks of a Differentiation


Business Level Strategy
Customers may decide that the
cost of uniqueness is too great
Competitors may learn how to
imitate Value Chain
The means of uniqueness may no
longer be valued by customers
Ch4-58

Generic Business Level Strategies


Source of Competitive Advantage

Breadth of
Competitive
Scope

Broad
Target
Market

Cost

Uniqueness

Cost
Leadership

Differentiation

Narrow
Target
Market
Ch4-59

Generic Business Level Strategies


Source of Competitive Advantage

Breadth of
Competitive
Scope

Cost

Uniqueness

Broad
Target
Market

Cost
Leadership

Differentiation

Narrow
Target
Market

Focused
Low Cost

Focused
Differentiation
Ch4-60

Focused Business Level Strategies


Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.
However, opportunities may exist because:
Large firms may overlook small niches
Firm may lack resources to compete industry-wide
May be able to serve a narrow market segment
more effectively than industrywide competitors
Focus can allow you to direct resources to certain
value chain activities to build competitive advantage
Ch4-61

Focused Business Level Strategies


Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.
However, opportunities may exist because:
May be able to retrofit old factories to keep costs
down
Minimize R&D costs by copying innovators
Examples:
Bang & Olufsen
Snap-on tools
Iams Company

Upscale electronic components


High quality mechanics tools
Premium pet foods

Ch4-62

Focused Business Level Strategies


Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.
However, opportunities may exist because:
Focused Differentiators may thrive by selecting a
small market that is underserved by large players
Example:

Custom manufacturers of parts for


Harley-Davidson motorcycles
Ch4-63

Major Risks Involved With a Focused


Differentiation Business Level Strategy

Firm may be outfocused by competitors


Large competitor may set its sights on your
niche market
Preferences of niche market may change to
match those of broad market
Ch4-64

Generic Business Level Strategies


Source of Competitive Advantage
Cost

Breadth of
Competitive
Scope

Broad
Target
Market

Narrow
Target
Market

Uniqueness

Cost
DifferenLeadership
tiation
Integrated
Low Cost/
Differentiation
Focused
Focused
DifferenLow Cost
tiation
Ch4-65

Integrated Low Cost/Differentiation Strategy


Firms using an Integrated Strategy may:
Adapt more quickly
Learn new skills and technologies
Utilize Flexible Manufacturing Systems to create
differentiated products at low costs
Leverage core competencies through Information
Networks across multiple business units
Utilize Total Quality Management (TQM) to
create high quality differentiated products which
simultaneously driving down costs

Ch4-66

Integrated Low Cost/Differentiation Strategy

Recognize that the Integrated Low Cost/


Differentiation business level strategy involves a
Compromise
The risk is that the firm may become Stuck in
the Middle lacking a strong commitment to or
expertise with either type of generic strategy

Ch4-67

Integrated Low Cost/Differentiation Strategy

Southwest Airlines
Low Cost
Use a single aircraft model
(Boeing 737)
Use secondary airports
Fly short routes
No meals
15 minute turnaround time
No reserved seats
No travel agent reservations

Differentiation
Focus on customer
satisfaction
High level of employee
dedication
New flight services for
business travelers
(phones and faxes)
Ch4-68