Business-Level Strategy:

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• Business-Level Strategy
• How do we compete?

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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Broad Target Market
Breadth of Competitive Scope
Narrow Target Market
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Broad Target Market
Differentiation
Breadth of Competitive Scope
Narrow Target Market
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Broad Target Market
Differentiation
Breadth of Competitive Scope
Focused Differentiation
Focused Low Cost
Narrow Target Market
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Integrated Low Cost/ Differentiation
Breadth of Competitive Scope
Focused Differen- tiation
Focused Low Cost
Narrow Target Market
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Profit (P C) Q
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The Experience Curve
The Law of Experience The unit cost value added
to a standard product declines by a constant
(typically 20-30) each time cumulative output
doubles.
1994
1995
Cost per unit of output
1996
1997
1998
1999
2000
Cumulative Output
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Examples of Experience Curves
Japanese clocks watches, 1962-72
UK refrigerators, 1957-71
1960 Yen 15K 20K 30K
Price Index 50 100 200 300
75
70 slope
100K 200K 500K 1,000K 5
10 50 Accumulated unit
production Accumulated
units (millions) (millions)
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Choices that Drive Costs
Economies of scale
Product features
Asset utilization
Performance
Capacity utilization pattern
Mix variety of products
- Seasonal, cyclical
Service levels
Interrelationships
Small vs. large buyers
- Order processing and distribution
Process technology
Value chain linkages
Wage levels
Product features
- Advertising Sales
- Logistics Operations
Hiring, training, motivation
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Value Chain of Firm Activities
Firm Infrastructure
Human Resource Management
MARGIN
Technological Development
Procurement
Service
Inbound Logistics
Marketing Sales
Outbound Logistics
Operations
MARGIN
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Inbound Logistics
Highly Efficient Systems to Link Suppliers
Products with the Firms Production Processes
Support Activities
Located in Close Proximity with Suppliers
Inbound Logistics
Primary Activities
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Operations
Relatively Few Management Layers to Reduce
Overhead
Firm Infrastructure
Effective Training Programs to Improve Worker
Efficiency and Effectiveness
Human Resource Management
Support Activities
MARGIN
Investments in Technology in order to Reduce
Costs Associated with Manufacturing Processes
Technological Development
Procurement
Frequent Evaluation Processes to Monitor
Suppliers Performances
Efficient Plant Scale to Minimize Manufacturing
Costs
Delivery Schedule that Reduces Costs
Small, Highly Trained Sales Force
Service
Inbound Logistics
Selection of Low Cost Transport Carriers
Products Priced to Generate Sales Volume
Outbound Logistics
Operations
Timing of Asset Purchases
Operations
MARGIN
Policy Choice of Plant Technology
Efficient Order Sizes
Organizational Learning
Primary Activities
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Outbound Logistics
Firm Infrastructure
Delivery Schedule that Reduces Costs
Human Resource Management
Support Activities
Selection of Low Cost Transport Carriers
MARGIN
Technological Development
Efficient Order Sizes
Procurement
Frequent Evaluation Processes to Monitor
Suppliers Performances
Delivery Schedule that Reduces Costs
Small, Highly Trained Sales Force
Effective Product Installations to Reduce
Frequency and Severity of Recalls
Interrelationships with Sister Units
Service
Outbound Logistics
Selection of Low Cost Transport Carriers
Products Priced to Generate Sales Volume
Outbound Logistics
Marketing Sales
MARGIN
National Scale Advertising
Efficient Order Sizes
Interrelationships with Sister Units
Primary Activities
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Marketing Sales
Firm Infrastructure
Small, Highly Trained Sales Force
Human Resource Management
Support Activities
Products Priced to Generate Sales Volume
MARGIN
Technological Development
Procurement
National Scale Advertising
Service
Outbound Logistics
Marketing Sales
Marketing Sales
Inbound Logistics
Operations
MARGIN
Primary Activities
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Service
Firm Infrastructure
Effective Product Installations to Reduce Recalls
Human Resource Management
Support Activities
MARGIN
Technological Development
Procurement
Service
Service
Inbound Logistics
Outbound Logistics
Marketing Sales
Operations
MARGIN
Primary Activities
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Firm Infrastructure
Human Resource Management
Support Activities
MARGIN
Technological Development
Procurement
Procurement
Service
Procurement
Inbound Logistics
Outbound Logistics
Marketing Sales
Operations
MARGIN
Frequent Evaluation Processes to Monitor
Suppliers Performances
Systems and Procedures to Find the Lowest Cost
Products to Purchase Raw Materials
Primary Activities
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Firm Infrastructure
Human Resource Management
Support Activities
MARGIN
Technological Development
Technological Development
Procurement
Technological Development
Service
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce
Costs Associated with Manufacturing Processes
Outbound Logistics
Inbound Logistics
Marketing Sales
Operations
MARGIN
Primary Activities
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Firm Infrastructure
Human Resource Management
Human Resource Management
Support Activities
MARGIN
Technological Development
Human Resource Management
Procurement
Consistent Policies to Reduce Turnover Costs
Effective Training Programs to Improve Worker
Efficiency and Effectiveness
Service
Outbound Logistics
Inbound Logistics
Marketing Sales
Operations
MARGIN
Primary Activities
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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Firm Infrastructure
Firm Infrastructure
Human Resource Management
Support Activities
MARGIN
Firm Infrastructure
Technological Development
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce
Overhead
Simplified Planning Practices to Reduce Planning
Costs
Procurement
Service
Marketing Sales
Outbound Logistics
Inbound Logistics
Operations
MARGIN
Primary Activities
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Effective Cost Leaders can remain profitable even
when the Five Forces appear unattractive
Threat of New Entrants
Bargaining Power of Suppliers
Rivalry Among Competing Firms in Industry
Bargaining Power of Buyers
Threat of Substitute Products
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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
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Effective Cost Leaders can remain profitable even
when the Five Forces appear unattractive
Threat of New Entrants
Can mitigate Buyer Power by
Bargaining Power of Buyers
Driving prices far below competitors may cause
exit and shift power back to firm

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Effective Cost Leaders can remain profitable even
when the Five Forces appear unattractive
Threat of New Entrants
Threat of Substitute Products
Well positioned relative to Substitutes in order
to
Bargaining Power of Buyers
Make investments to create substitutes first

Buy patents developed by potential substitutes

Lower prices to maintain value position

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Effective Cost Leaders can remain profitable even
when the Five Forces appear unattractive
Threat of New Entrants
Bargaining Power of Suppliers
Can mitigate Supplier Power by
Bargaining Power of Buyers
Low cost position makes them better able to
absorb cost increases

More likely to make very large purchases which
reduces chance of supplier power

Threat of Substitute Products
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Effective Cost Leaders can remain profitable even
when the Five Forces appear unattractive
Competitors avoid price wars with Cost Leaders,
which creates higher profits for entire industry
Threat of New Entrants
Rivalry Among Competing Firms in Industry
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products
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Dramatic technological change could take away
your cost advantage
The Major Risks involved with a Cost Leadership
Business Level Strategy
Competitors may learn how to imitate Value Chain
Focus on efficiency could cause Cost Leader to
overlook changes in customer preferences
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Breadth of Competitive Scope
Narrow Target Market
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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
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Drivers of Differentiation
Some Examples
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
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Value Creating Activities common to a
Differentiation Business Level Strategy
Firm Infrastructure
Human Resource Management
Support Activities
MARGIN
Technological Development
Procurement
Service
Marketing Sales
Inbound Logistics
Outbound Logistics
Operations
MARGIN
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Inbound Logistics
Superior handling of incoming raw materials to
minimize damage and improve the quality of the
final product
Support Activities
Inbound Logistics
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Operations
Consistent manufacturing of attractive products
Support Activities
Rapid responses to customers unique manufacturing
specifications
Operations
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Outbound Logistics
Accurate and responsive order processing
procedures
Support Activities
Rapid and timely product deliveries to customers
Outbound Logistics
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Marketing Sales
Strong Coordination among functions in RD,
Marketing and Product Development
Support Activities
Extensive personal relationships with buyers
Premium Pricing
Marketing Sales
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Service
Complete field stocking of replacement parts
Support Activities
Service
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Support Activities
Procurement
Procurement
Located in Close Proximity with Suppliers
Systems and procedures used to find the highest
quality raw materials
Purchase of highest quality replacement parts
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Support Activities
Technological Development
Technological Development
Strong capability in basic research
Investments in technol-ogies to produce highly
differentiated products
Coordination among RD, marketing and product
development
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Support Activities
Human Resource Management
Compensation programs which encourage worker
creativity and productivity
Extensive use of subjective performance measures
Superior personnel training
Primary Activities
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Value Creating Activities common to a
Differentiation Business Level Strategy
Firm Infrastructure
Support Activities
Firm Infrastructure
A companywide emphasis on producing high quality
products
Highly developed Information Systems to better
understand customers purchasing preferences
Primary Activities
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Differentiation Business Level Strategy
Effectiveness with Differentiation grows out of
Value Chain activities
Examples
Heineken beer
Raw materials brand name
Steinway pianos
Raw materials Workmanship
Mercedes Benz autos
Technology and Workmanship
Intel microprocessors
Technological superiority
Service buyers needs quickly anywhere in the
world
Caterpillar tractors
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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

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Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of New Entrants
Can mitigate Buyer Power because
Bargaining Power of Buyers
Well differentiated products reduce customer
sensitivity to price increases
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Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of New Entrants
Threat of Substitute Products
Well positioned relative to Substitutes because
Bargaining Power of Suppliers
Brand loyalty tends to reduce new product trial
and brand switching

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Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Threat of Substitute Products
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Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Brand loyalty overcomes much price competition
Threat of New Entrants
Rivalry Among Competing Firms in Industry
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products
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Customers may decide that the cost of
uniqueness is too great
The Major Risks involved with a Differentiation
Business Level Strategy
Competitors may learn how to imitate Value Chain
The means of uniqueness may no longer be valued
by customers
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Breadth of Competitive Scope
Focused Differen- tiation
Focused Low Cost
Narrow Target Market
48
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 industry-wide competitors
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Focused Business Level Strategies
Focused Business Level Strategies involve the
same basic approach as Broad Market Strategies

May be able to retrofit old factories to keep
costs down

Minimize RD costs by copying innovators
- Bang Olufsen
Upscale electronic components
High quality mechanics tools
- Snap-On tools
Premium pet foods
- IAMS
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Focused Business Level Strategies
Focused Business Level Strategies involve the
same basic approach as Broad Market Strategies

Focused Differentiators may thrive by selecting a
small market that is underserved by large players
Custom manufacturers of parts for
Harley-Davidson
motorcycles
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Firm may be outfocused by competitors
The Major Risks involved with a
Focused Differentiation Business Level Strategy
Large competitor may set its sights on your niche
market
Preferences of niche market may change to match
those of broad market
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Integrated Low Cost/ Differentiation
Breadth of Competitive Scope
Focused Differen- tiation
Focused Low Cost
Narrow Target Market
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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
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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
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Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Differentiation
Low Cost
Use a single aircraft model (Boeing 737)
Focus on customer satisfaction
Use secondary airports
High level of employee dedication
Fly short routes
No meals
New flight services for business
travelers (Phones and faxes)
15 minute turnaround time
No reserved seats
No travel agent reservations
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What is the Strategy?
Friendly Robotics