Chapter 4 Chapter 4

Business-Level Strategy

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

Strategic Inputs

Chapter 2 External Environment Chapter 3 Internal Environment

Strategic Intent Strategic Mission

The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance Chapter 12 Strategic Leadership Chapter 11 Structure & Control
Entrepreneurship

Strategy Formulation
Chapter 4 Business-Level Strategy Chapter 7 Acquisitions & Restructuring Chapter 5 Competitive Dynamics Chapter 8 International Strategy Chapter 6 Corporate-Level Strategy Chapter 9 Cooperative Strategies

Strategic Actions

Chapter 13

& Innovation

Outcomes

Strategic

Feedback

Strategic Competitiveness Above Average Returns

Chapter 2

External Environment

Chapter 3

Sustainable Competitive Advantage

Internal Environment

Chapter 4 Business Level Strategy

Core Competenc y

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

Core Competency

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

Strateg y

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

Core Competency

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

Strategy

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

Business Level Strategy

Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets.

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

Basis for Customer Segmentation

Industrial Markets
1. End use segments 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

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation Focused Differentiation

Narrow Target Market

Focused Low Cost

Cost Leadership Business Level Strategy

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

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

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Firm Infrastructure
Support Activities

Human Resource Management Technological Development Procurement

M A RG

IN

Operations

Outbound Logistics

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

Consistent Policies to Reduce Turnover Costs

Human Resource Management Technological Development

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

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Easy-to-Use Manufacturing Technologies

M A RG

IN

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Frequent Evaluation Processes to Procurement Monitor Suppliers Performances

Operations

Outbound Logistics

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

National Scale Advertising

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

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

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

Value Creating Activities Common to a Inbound Cost Leadership Business Level Strategy Logistics
Cost Effective MIS Systems

Firm Infrastructure Highly Efficient

Consistent Policies to Reduce Turnover Costs

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Systems to LinkPrograms Effective Training Improve Human ResourcetoManagement Suppliers Worker Efficiency and Effectiveness Products with the Easy-to-Use Manufacturing Investments in Technology in order Firms Production with Technologies to Reduce Costs Associated Technological Development Manufacturing Processes Processes
Frequent Evaluation Procurement CloseProcesses to Monitor Suppliers Performances Located in Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

M A RG

IN

Operations

Outbound Logistics

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

National Scale Advertising

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Inbound Logistics Logistics

M Service A R G IN

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

Proximity with Highly Small, Suppliers Trained Sales Force

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

Value Creating Activities Common to a Operations Cost Leadership Business Level Strategy Efficient Plant
Cost Effective MIS Systems

Firm

Simplified Planning Practices to Reduce Planning Costs

Support Activities

Consistent Policies to Reduce Turnover Costs

Policy Choice of Systems and Procedures to find the Frequent Evaluation Processes to Lowest Cost Products to Purchase Procurement Plant Technology
Manufacturing Processes Raw Materials Monitor Suppliers Performances

Human Resource ManagementAsset MA Timing of RG Purchases Easy-to-Use Manufacturing Investments in Technology in order Technologies to Reduce Costs Associated Technological Developmentwith
Effective Training Programs to Improve Worker Efficiency and Effectiveness Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers

Efficient Plant Scale Infrastructure to Minimize Mfg. Costs

Relatively Few Management Layers to Reduce Overhead

IN

Operations

Outbound Logistics

and Severity Products Priced to of Recalls Generate Sales Volume National Scale Advertising

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

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

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

Value Creating Activities Common to a Outbound Cost Leadership Business Level Strategy Logistics
Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

M Human Resource ManagementSelection of Low A RG Easy-to-Use Manufacturing Investments in Technology in order Cost Transport Technologies to Reduce Costs Associated Technological DevelopmentwithCarriers IN Manufacturing Processes Systems and Procedures to find the Efficient Order Frequent Evaluation Processes to Lowest Cost Products to Purchase Procurement Monitor Suppliers Performances Sizes Raw Materials
Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness

Delivery Schedule that Reduces Costs

Operations

Outbound Outbound Logistics Logistics

Generate Sales Volume National Scale Advertising

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

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

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 Interrelationship Installations to s Reduce Frequency with Sister and Severity Units Products Priced to of Recalls

Value Creating Activities Common to a Marketing Cost Leadership Business Level Strategy & Sales
Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

Consistent Policies to Reduce Turnover Costs

Human Resource Management Technological Development

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

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Small, Highly Trained Sales Force Products Priced A RG to Generate Sales Volume I N National Scale Advertising

Easy-to-Use Manufacturing Technologies

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Frequent Evaluation Processes to Procurement Monitor Suppliers Performances

Operations

Outbound Logistics

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

National Scale Advertising

Interrelationships with Sister Units

Primary Activities

Marketing & Sales & Sales

Inbound Logistics

M Service A R G IN

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

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

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Effective Product Effective Training Programs Installations to Consistent Policies to toManagement Improve Worker Human ResourceEfficiency and EffectivenessReduce MA Reduce Turnover Costs RG Recalls Easy-to-Use Manufacturing Investments in Technology in order
Technologies to Reduce Costs Associated Technological Developmentwith Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Procurement Monitor Suppliers Performances Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Service

Support Activities

IN

Operations

Outbound Logistics

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

National Scale Advertising

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Logistics

Service M Service A R G IN

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

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

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

Consistent Policies to Reduce Turnover Costs

Human Resource Management Technological Development

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

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Easy-to-Use Manufacturing Technologies

M A RG

IN

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Frequent Evaluation Processes to Procurement Monitor Suppliers Performances Procurement

Operations

Outbound Logistics

Procurement
Interrelationships with Sister Units

Systems and Procedures to Find Located in Close Policy Choice of Efficient Order the Lowest Cost ProductsSizes Plant Technology to Proximity with Suppliers Purchase Raw Materials
Organizational Learning

National Scale Advertising

Frequent Evaluation Processes to Monitor Suppliers Performances

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

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

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

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

Consistent Policies to Reduce Turnover Costs

Human Resource Management Technological Development

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

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Easy-to-Use Manufacturing Technologies

M A RG

IN

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Frequent Evaluation Processes to Procurement Monitor Suppliers Performances

Operations

Outbound Logistics

Easy-to-Use Manufacturing Technologies

Located in Close Proximity with Suppliers

Policy Choice of Plant Technology Organizational Learning

Investments in Technology in order to Reduce Costs Associated with Manufacturing Efficient Order National Scale Sizes Processes Advertising
Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

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

Technological Development

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

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

Consistent Policies to Reduce Turnover Costs

Human Resource Management Technological Development

Delivery Schedule Small, Highly that Reduces Trained Sales Costs Force Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Frequent Evaluation Processes to Monitor Suppliers Performances

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Easy-to-Use Manufacturing Technologies

M A RG

IN

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Human Procurement Resource Management

Operations Outbound Logistics Marketing & Sales
M Service A R G IN
Effective Product Effective Training Programs Installations to to Improve WorkerReduce Frequency and Severity Efficiency and Effectiveness Selection of Low Products Priced to of Recalls Cost Transport Carriers Generate Sales Volume National Scale Advertising

Products with the Costs Firms Production Timing of Asset Processes Purchases Located in Close Proximity with Suppliers

Inbound Logistics

Highly Efficient Efficient Plant Consistent Policies to Systems to Link Scale to Minimize Reduce Turnover Costs Suppliers Manufacturing

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

Interrelationships with Sister Units

Primary Activities

Value Creating Activities Common to a Cost Leadership Business Level Strategy

Cost Effective MIS Systems

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Support Activities

Consistent Policies to Reduce Turnover Costs

Human Resource Management Technological Development Firm Infrastructure

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

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Easy-to-Use Manufacturing Technologies

M A RG

Operations

Outbound Logistics

Located in Close Proximity with Suppliers

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

National Scale Advertising

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Logistics

Systems to Link Suppliers Products with the Firms Production Processes

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

Trained Sales Force

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

M Service A R G IN

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

IN

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

Reconfiguring the Value Chain of Iowa Beef Packers (IBP)

Old Way:
Ranch Cattle Ship on the Hoof to Rail Center (Chicago) Slaughter into sides of beef Boxed Cuts at Markets

New New Way: Way

Locate large automated plants near ranches

Process into Boxed Cuts at plants

Ship cuts already Boxed to Markets

Save on shipping and cattle weight loss Utilize cheaper non-union rural labor

Choices That Drive Costs

Economies of scale Asset utilization Capacity utilization pattern - Seasonal, cyclical Interrelationships - Order processing and distribution Value chain linkages - Advertising & Sales - Logistics & Operations Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation

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

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive

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

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

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Well positioned relative toThreat of New Substitutes in order to: Entrants * Make investments to create
substitutes first * Buy patents developed by potential substitutes
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

* Lower prices to maintain

value position Threat of Substitute Products

Bargaining Power of Buyers

Can mitigate Buyer Power by: Driving prices far below competitors which may cause exit and shift power back to firm

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

Bargaining Power of Suppliers

Can mitigate Supplier Power by:

* Low cost position makes them better able to absorb cost increases Well positioned relative to Can mitigate Buyer Power by:
Substitutes in order to: Driving prices far * More likely to make very large purchases whichbelow Threat of competitors may Can buy patents developed by * which reduces chance Substitute of supplier power and shift power cause exit potential substitutes * Make investments to create substitutes * Lower prices to maintain value position

Bargaining Power of Buyers

Products

back to firm

Effective Cost Leaders can remain profitable even when Competitors the Five Forces appear unattractive avoid price wars with Cost Leaders, which due Can mitigate Supplier Power by: Can frighten off New Entrants Threat of to the need * Low cost position makes them createsto: Scale to be higher profits Enter at Large New * better able to absorb cost increases Cost Competitive for entire industry Entrants * More likely to make very large
purchases which reduces chance of supplier power * Take time to move down the Learning Curve

Bargaining Power of Suppliers

Well positioned relative to Substitutes in order to:

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Can mitigate Buyer Power by:

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

Threat of Substitute Products

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

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

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Narrow Target Market

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

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

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

Value Creating Activities Common to a Differentiation Business Level Strategy

Firm Infrastructure
Support Activities

Human Resource Management Technological Development Procurement

M A RG

IN

Operations

Outbound Logistics

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

Value Creating Activities Common to a Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences

Firm Infrastructure
Extensive use of subjective rather than objective performance measures

A companywide emphasis on producing high quality products Superior personnel training

Support Activities

Compensation programs intended to encourage worker creativity and productivity Coordination among R&D, product development and marketing

Human Resource Management Technological Development Procurement parts replacement

Purchase of highest quality Consistent manufacturing of attractive products Accurate and responsive order processing procedures Investments in technologies that will allow the firm to consistently produce highly differentiated products

M A RG Strong
capability in basic research

IN

Systems and procedures used to find the highest quality raw materials Superior handling of incoming raw materials to minimize damage and improve the quality of the final product

Operations

Outbound Logistics

Rapid responses to customers unique manufacturing specifications

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

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

Value Creating Activities Common to a Inbound Differentiation Business Level Strategy Logistics
Highly Developed Information Systems to better understand customers purchasing preferences Compensation programs intended to encourage worker creativity and productivity

Firm Infrastructure Superior handling

Extensive use of subjective rather than objective performance measures

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A companywide emphasis on producing high quality products

Support Activities

Operations

Outbound Logistics

Rapid responses to customers unique manufacturing specifications

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

Primary Activities

Marketing & Sales

Inbound Inbound Logistics Logistics

M Service A R G IN

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

Consistent manufacturing of attractive products

Accurate and responsive order processing procedures

Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

Value Creating Activities Common to a Operations Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences

Firm

Support Activities

Compensation programs intended to encourage worker creativity and productivity

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A companywide emphasis on producing high quality products

Procurement parts replacement

basic manufacturing research specifications Purchase of highest quality

IN

Operations

Outbound Logistics

Rapid responses to customers unique manufacturing specifications

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

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

Accurate and responsive order processing procedures

Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

Value Creating Activities Common to a Outbound Differentiation Business Level Strategy Logistics
Highly Developed Information Systems to better understand customers purchasing preferences

Accurate and responsive order Compensation programs Extensive use of subjective Superior intended to encourage worker rather than objective personnel M Human Resource Management processing creativity and productivity performance measures training A procedures R Coordination among R&D, Investments in technologies that will Strong
product development and marketing

Firm Infrastructure

A companywide emphasis on producing high quality products

Support Activities

Operations

Outbound Outbound Logistics Logistics

Rapid responses to customers unique manufacturing specifications

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

Primary Activities

Marketing & Sales

Inbound Logistics

M Service A R G IN

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

Rapid and timely Systems and procedures used to find Purchase of highest quality product deliveries the highest quality rawProcurement parts materials replacement to customers Strong CoordinConsistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

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IN

Value Creating Activities Common to a Marketing Differentiation Business Level Strategy & Sales
Highly Developed Information Systems to better understand customers purchasing preferences

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Systems and procedures used to find the highest quality raw materials Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products

Firm Infrastructure

A companywide emphasis on producing high quality products

Support Activities

Procurement parts replacement

Purchase of highest quality

Operations

Outbound Logistics

Rapid responses to customers unique manufacturing specifications

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

Primary Activities

Marketing & Sales & Sales

Inbound Logistics

M Service A R G IN

Accurate and responsive order processing procedures

Strong Coordination among functions in R&D, Marketing and Product Development

relationships with buyers Complete field Premium stocking of replacement parts Pricing

Value Creating Activities Common to a Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences

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 RG Coordination among R&D, Investments in technologies that willparts Strong
product development and marketing allow Development Technological the firm to consistently produce highly differentiated products capability in basic research Systems and procedures used to find the highest quality raw materials Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products

Firm Infrastructure

A companywide emphasis on producing high quality products

Service

Support Activities

IN

Procurement parts replacement

Purchase of highest quality

Operations

Outbound Logistics

Rapid responses to customers unique manufacturing specifications

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

Primary Activities

Marketing & Sales

Inbound Logistics

Service M Service A R G IN

Accurate and responsive order processing procedures

Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

Value Creating Activities Common to a Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences

Firm Infrastructure
Extensive use of subjective rather than objective performance measures

A companywide emphasis on producing high quality products Superior personnel training

Support Activities

Compensation programs intended to encourage worker creativity and productivity Coordination among R&D, product development and marketing

Human Resource Management Technological Development Procurement parts replacement Procurement

Purchase of highest quality Consistent manufacturing of attractive products Accurate and responsive order processing procedures Investments in technologies that will allow the firm to consistently produce highly differentiated products

M A RG Strong
capability in basic research

IN

Systems and procedures used to find the highest quality raw materials Superior handling of incoming raw materials to minimize damage and improve the quality of the final product

Operations

Outbound Logistics

Systems and procedures used to find the highest quality raw materials

Rapid responses to customers unique manufacturing specifications

Procurement

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

Purchase of highest quality replacement parts Premium

Marketing & Sales

Inbound Logistics

Located in Close Proximity with Suppliers

Primary Activities

M Service A R G IN

Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

Value Creating Activities Common to a Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences

Firm Infrastructure
Extensive use of subjective rather than objective performance measures

A companywide emphasis on producing high quality products Superior personnel training

Support Activities

Compensation programs intended to encourage worker creativity and productivity Coordination among R&D, product development and marketing

Human Resource Management Technological Development Procurement parts replacement

Purchase of highest quality Consistent manufacturing of attractive products Accurate and responsive order processing procedures Investments in technologies that will allow the firm to consistently produce highly differentiated products

M A RG Strong
capability in basic research

IN

Systems and procedures used to find the highest quality raw materials Superior handling of incoming raw materials to minimize damage and improve the quality of the final product

Operations

Outbound Logistics

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
unique manufacturing specifications product deliveries relationships to customers with buyers Premium Pricing

Marketing & Sales

Inbound Logistics

Primary Activities

M Service A R G IN

Technological Development

Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development

Strong capability in basic research

Value Creating Activities Common to a Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences

Firm Infrastructure
Extensive use of subjective rather than objective performance measures

A companywide emphasis on producing high quality products Superior personnel training

Support Activities

Compensation programs intended to encourage worker creativity and productivity Coordination among R&D, product development and marketing

Human Resource Management Technological Development

Purchase of highest quality replacement parts Investments in technologies that will allow the firm to consistently produce highly differentiated products

M A RG Strong
capability in basic research

IN

Systems and procedures used to find the highest quality raw materials

Human Procurement Resource Management

Operations Outbound Logistics Marketing & Sales
M Service A R G IN

minimize damage and improve the quality of the final product

Inbound Logistics

Compensation programs Accurate and Extensive useCoordin- Complete field Superior Strong of Superior Consistent handling of manufacturing which encourage worker of responsive order ation amongR&D, stocking ofpersonnel subjective performance functions in incoming raw attractive processing replacement parts products materials to creativity and productivity procedures measuresMarketing and training Product
Development Rapid responses to customers unique manufacturing specifications Extensive Rapid and timely personal product deliveries relationships to customers with buyers Premium Pricing

Primary Activities

Value Creating Activities Common to a Differentiation Business Level Strategy

Highly Developed Information Systems to better understand customers purchasing preferences

Firm Infrastructure
Extensive use of subjective rather than objective performance measures

A companywide emphasis on producing high quality products Superior personnel training

Support Activities

Compensation programs intended to encourage worker creativity and productivity Coordination among R&D, product development and marketing

Human Resource Management Technological Development Firm Infrastructure

Investments in technologies that will allow the firm to consistently produce highly differentiated products

M A RG Strong
capability in basic research

Operations

Outbound Logistics

Rapid responses to customers unique manufacturing specifications

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

Primary Activities

Marketing & Sales

Inbound Logistics

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

manufacturing of responsive order attractive processing products procedures

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

M Service A R G IN

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

IN

Differentiation Business Level Strategy

Effectiveness with Differentiation grows out of Value Chain activities
Examples:

Heineken beer Steinway pianos Mercedes Benz autos Intel microprocessors Caterpillar tractors

Raw materials Raw materials & Workmanship Technology and Workmanship Technological superiority Service buyers needs quickly anywhere in the world

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

Drivers of Differentiation
Examples:

Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information

Effective Differentiators can remain profitable even when the Five Forces appear unattractive

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

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

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

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

Bargaining Power of Suppliers

Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases

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

Bargaining Power of Suppliers

Can mitigate Supplier Power by:

Bargaining * Absorbing price increases due to Power of higher margins Suppliers Well positioned relative to Substitutes because: * Passing on higher supplier prices * Brand loyalty tends to 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

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

Threat of New Entrants

Can fend off New Entrants because:

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

Bargaining Power of Buyers

Well positioned relative to Substitutes because: * Brand loyalty tends to reduce new product trial and brand switching

Rivalry Among Competing Firms in Industry

Bargaining Power of Suppliers

Threat of Substitute Products

Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases

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

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Focused Low Cost

Focused Differentiation

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

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

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

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

Generic Business Level Strategies

Source of Competitive Advantage
Cost Uniqueness

Breadth of Competitive Scope

Broad Target Market

Narrow Target Market

Cost DifferenLeadership tiation Integrated Low Cost/ Differentiation Focused Focused DifferenLow Cost tiation

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

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

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)