Ch4-1
Business-Level StrategyBusiness-Level Strategy
Ch4-2
Chapter 4
Business LevelStrategy
SustainableCompetitiveAdvantage
Chapter 2Chapter 2
External EnvironmentExternal Environment
Chapter 3Chapter 3Internal EnvironmentInternal Environment
Ch4-3
CoreCompetency
CoreCompetency
The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.
The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.
Ch4-4
StrategyStrategy
An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.
An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.
CoreCompetency
The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.
Ch4-5
StrategyAn integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.
Business Level Strategy
Business Level Strategy
Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets.
Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets.
CoreCompetency
The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.
Ch4-6
Generic Business Level Strategies
Cost Uniqueness
Source of Competitive Advantage
Breadth of Competitive
Scope
BroadTargetMarket
NarrowTargetMarket
Focused Differen-
tiation
Focused Differen-
tiation
CostLeadership
CostLeadership
Differen-tiation
Differen-tiation
Focused Low CostFocused
Low Cost
CostLeadership
Ch4-7
Key Criteria:Key Criteria:
Cost Leadership Business Level StrategyCost Leadership Business Level Strategy
Relatively standardized productsRelatively standardized products
Features acceptable to many customersFeatures acceptable to many customers
Lowest competitive priceLowest competitive price
Ch4-8
Requirements:Requirements:Constant effort to reduce costs through:Constant effort to reduce costs through:
Building efficient scale facilitiesBuilding efficient scale facilities
State of the art manufacturing facilitiesState of the art manufacturing facilities
Simplification of processesSimplification of processes
Minimizing costs of sales, R&D and serviceMinimizing costs of sales, R&D and service
Monitoring costs of activities provided by outsidersMonitoring costs of activities provided by outsiders
Tight control of production costs and overheadTight control of production costs and overhead
Cost Leadership Business Level StrategyCost Leadership Business Level Strategy
Ch4-9Primary Activities
Su
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Act
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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Value Creating Activities Common to a Cost Leadership Business Level StrategyValue Creating Activities Common to a Cost Leadership Business Level Strategy
Ch4-10Primary Activities
Su
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Act
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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Policies to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset
Purchases
Efficient Plant Scale to Minimize Manufacturing Costs
Selection of Low Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Technology
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Value Creating Activities Common to a Cost Leadership Business Level StrategyValue Creating Activities Common to a Cost Leadership Business Level Strategy
Ch4-11
How to Obtain a Cost AdvantageHow to Obtain a Cost Advantage
1. Determine and Control Cost Drivers1. Determine and Control Cost Drivers
2. Reconfigure the Value Chain as needed2. Reconfigure the Value Chain as needed
Alter production processAlter production process
Change in automationChange in automationNew distribution channelNew distribution channel
Direct sales in place of indirect salesDirect sales in place of indirect sales
New advertising mediaNew advertising media
New raw materialNew raw material
Backward integrationBackward integrationForward integrationForward integration
Change location relative to suppliers or buyersChange location relative to suppliers or buyers
Ch4-12
Reconfiguring the Value Chainof Iowa Beef Packers (IBP)
Reconfiguring the Value Chainof Iowa Beef Packers (IBP)
Ranch CattleRanch Cattle
Ship “on the Hoof” to Rail
Center (Chicago)
Ship “on the Hoof” to Rail
Center (Chicago)
Slaughter into sides
of beef
Slaughter into sides
of beef
“Boxed Cuts” at Markets
“Boxed Cuts” at Markets
Old Way:Old Way:
Save on shipping and cattle weight lossSave on shipping and cattle weight loss
Utilize cheaper non-union rural laborUtilize cheaper non-union rural labor
NewWayNew Way:New Way:
Locate large automated plants near
ranches
Locate large automated plants near
ranches
Process into “Boxed Cuts” at
plants
Process into “Boxed Cuts” at
plants
Ship cuts already
“Boxed” to Markets
Ship cuts already
“Boxed” to Markets
Ch4-13
Choices That Drive CostsChoices That Drive Costs
Economies of scale
Asset utilization
Capacity utilization pattern
Value chain linkages
Interrelationships
- Advertising & Sales- Logistics & Operations
- Seasonal, cyclical
- Order processing and distribution
Product features
Product features
Performance
Mix & variety of products
Service levels
Small vs. large buyers
Process technology
Wage levels
Hiring, training, motivation
Ch4-14
Three Key QuestionsThree Key Questions
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 distributorsGallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors
1. How can an activity be performed differently or even eliminated?
Ch4-15
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
Ch4-16
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
Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
Threat of New
Entrants
Threat of New
Entrants
Ch4-17
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
Bargaining Power of Buyers
Threat of New
Entrants
Can mitigate Buyer Power by:Can mitigate Buyer Power by:
** Driving prices far below competitors may cause exit and shift power back to firm
Driving prices far below competitors may cause exit and shift power back to firm
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
Ch4-18
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:
Threat of New
Entrants
Bargaining Power of Buyers
Driving prices far below competitors which may cause exit and shift power back to firm
Well positioned relative to Substitutes in order to:Well positioned relative to Substitutes in order to:
Make investments to create substitutes firstMake investments to create substitutes first
**
Buy patents developed by potential substitutesBuy patents developed by potential substitutes
**
Lower prices to maintain value positionLower prices to maintain value position
**
Threat of Substitute Products
Threat of Substitute Products
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
Ch4-19
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”
*
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 Suppliers
Bargaining Power of Suppliers
Threat of New
Entrants
Threat of Substitute Products
Can mitigate Buyer Power by:
Bargaining Power of Buyers
Driving prices far below competitors which may cause exit and shift power back to firm
Can mitigate Supplier Power by:Can mitigate Supplier Power by:
Low cost position makes them better able to absorb cost increasesLow cost position makes them better able to absorb cost increases
**
More likely to make very large purchases which reduces chance of supplier powerMore likely to make very large purchases which reduces chance of supplier power
**
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
Ch4-20
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
Bargaining Power of Suppliers
Threat of Substitute Products
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”
*
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
*
Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry
Rivalry Among Competing Firms
in Industry
Rivalry Among Competing Firms
in Industry
Can mitigate Buyer Power by:
Bargaining Power of Buyers
Driving prices far below competitors which may cause exit and shift power back to firm
Can mitigate Supplier Power by:
Low cost position makes them better able to absorb cost increases
*
More likely to make very large purchases which reduces chance of supplier power
*
Ch4-21
Major Risks of Cost LeadershipBusiness Level Strategy
Major Risks of Cost LeadershipBusiness 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
Ch4-22
Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
CostLeadership
Uniqueness
Generic Business Level StrategiesGeneric Business Level Strategies
Ch4-23
Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
CostLeadership
Differen-tiation
Differen-tiation
Generic Business Level StrategiesGeneric Business Level Strategies
Uniqueness
Ch4-24
Key Criteria:Key Criteria:
Differentiation Business Level StrategyDifferentiation Business Level Strategy
Value provided by unique features and value characteristicsValue provided by unique features and value characteristics
Command premium priceCommand premium price
Superior qualitySuperior quality
Rapid innovationRapid innovation
Prestige or exclusivityPrestige or exclusivity
High customer serviceHigh customer service
Ch4-25
Differentiation Business Level StrategyDifferentiation Business Level Strategy
Requirements:
Constant effort to differentiate products through:
Developing new systems and processes
Quality focus
Maximize Human Resource contributions through low turnover and high motivation
Capability in R&D
Shaping perceptions through advertising
Ch4-26Primary Activities
Su
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Act
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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Value Creating Activities Common to a Differentiation Business Level Strategy
Ch4-27
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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A companywide emphasis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferences
Compensation programs intended to encourage worker creativity and productivity
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in technologies that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Primary Activities
Su
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Act
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Value Creating Activities Common to a Differentiation Business Level Strategy
Ch4-28
Effectiveness with Differentiation grows out of Value Chain activitiesEffectiveness with Differentiation
grows out of Value Chain activities
Examples:
Heineken beerHeineken beer Raw materialsRaw materials
Caterpillar tractorsCaterpillar tractors Service buyers’ needs quickly anywhere in the worldService buyers’ needs quickly anywhere in the world
Intel microprocessorsIntel microprocessors Technological superiorityTechnological superiority
Steinway pianosSteinway pianos Raw materials & Workmanship Raw materials & Workmanship
Mercedes Benz autosMercedes Benz autos Technology and WorkmanshipTechnology and Workmanship
Differentiation Business Level StrategyDifferentiation Business Level Strategy
Ch4-29
• Creating barriers by perceptions of uniqueness• Creating barriers by perceptions of uniqueness
• Creating switching costs through differentiation• Creating switching costs through differentiation
Raising Buyers’ Performance
Lowering Buyers’ Costs
Creating Sustainability through:
Create Value with Differentiation by:Create Value with Differentiation by:
Ch4-30
Drivers of DifferentiationDrivers of Differentiation
Unique product featuresUnique product features
Unique product performanceUnique product performance
Exceptional servicesExceptional services
Quality of inputsQuality of inputs
New technologiesNew technologies
Exceptional skill or experienceExceptional skill or experience
Detailed informationDetailed information
Examples:
Ch4-31
Effective Differentiators can remain profitable even when the
Five Forces appear unattractive
Effective Differentiators can remain profitable even when the
Five Forces appear unattractive
Ch4-32
Effective Differentiators can remain profitable even when the Five Forces appear unattractiveEffective Differentiators can remain profitable even when the Five Forces appear unattractive
Threat of New
Entrants
Threat of New
Entrants
Can fend off New Entrants because:
New products must surpass proven products
*
Or be equal to performance at lower prices
*
Ch4-33
Can mitigate Buyer Power because:Can mitigate Buyer Power because:
Well differentiated products reduce customer sensitivity to price increases Well differentiated products reduce customer sensitivity to price increases
Bargaining Power of
Buyers
Bargaining Power of
Buyers
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 unattractiveEffective Differentiators can remain profitable even when the Five Forces appear unattractive
Ch4-34
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
Well positioned relative to Substitutes because:Well positioned relative to Substitutes because:
Brand loyalty tends to reduce new product trial and brand switching
Brand loyalty tends to reduce new product trial and brand switching
**
Threat of Substitute Products
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 unattractiveEffective Differentiators can remain profitable even when the Five Forces appear unattractive
Ch4-35
Bargaining Power of Suppliers
Bargaining Power of Suppliers
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 Buyer Power because well differentiated products reduce customer sensitivity to price increases
Effective Differentiators can remain profitable even when the Five Forces appear unattractiveEffective Differentiators can remain profitable even when the Five Forces appear unattractive
Threat of Substitute Products
Well positioned relative to Substitutes because:
Brand loyalty tends to reduce new product trial and brand switching
*
Can mitigate Supplier Power by:Can mitigate Supplier Power by:
Absorbing price increases due to higher marginsAbsorbing price increases due to higher margins
**
Passing on higher supplier prices because buyers are brand loyalPassing on higher supplier prices because buyers are brand loyal
**
Ch4-36
Rivalry Among Competing Firms
in Industry
Rivalry Among Competing Firms
in Industry
Threat of New
Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products
Well positioned relative to Substitutes because:
Brand loyalty tends to reduce new product trial and brand switching
*
Can mitigate Supplier Power by:
*
*
Absorbing price increases due to higher margins
Passing on higher supplier prices because buyers are brand loyal
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 unattractiveEffective Differentiators can remain profitable even when the Five Forces appear unattractive
Can fend off New Entrants because:
New products must surpass proven products
*
Or be equal to performance at lower prices
*
Brand loyalty overcomes much price competition
Brand loyalty overcomes much price competition
Ch4-37
Customers may decide that the cost of “uniqueness” is too greatCustomers may decide that the cost of “uniqueness” is too great
The means of uniqueness may no longer be valued by customersThe means of uniqueness may no longer be valued by customers
Competitors may learn how to imitate Value ChainCompetitors may learn how to imitate Value Chain
Major Risks of a DifferentiationBusiness Level Strategy
Major Risks of a DifferentiationBusiness Level Strategy
Ch4-38
Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
CostLeadership
Differen-tiation
Differen-tiation
Uniqueness
Generic Business Level Strategies
Ch4-39
Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
CostLeadership
Differen-tiation
Differen-tiation
Focused Differen-
tiation
Focused Differen-
tiation
Focused Low CostFocused
Low Cost
Uniqueness
Generic Business Level Strategies
Ch4-40
Focused Business Level Strategies involve the same basic approach as Broad Market Strategies.
However, opportunities may exist because:However, opportunities may exist because:
Focused Business Level StrategiesFocused Business Level Strategies
Large firms may overlook small nichesLarge firms may overlook small niches
Firm may lack resources to compete industry-wideFirm may lack resources to compete industry-wide
May be able to serve a narrow market segment more effectively than industrywide competitorsMay 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 advantageFocus can allow you to direct resources to certain value chain activities to build competitive advantage
Ch4-41
Bang & OlufsenBang & Olufsen Upscale electronic componentsUpscale electronic components
Iams CompanyIams Company Premium pet foodsPremium pet foods
Snap-on toolsSnap-on tools High quality mechanics’ toolsHigh quality mechanics’ tools
Focused Business Level StrategiesFocused Business Level StrategiesFocused Business Level Strategies involve the same basic approach as Broad Market Strategies.
However, opportunities may exist because:However, opportunities may exist because:
Examples:
May be able to retrofit old factories to keep costs downMay be able to retrofit old factories to keep costs down
Minimize R&D costs by copying innovatorsMinimize R&D costs by copying innovators
Ch4-42
Firm may be “outfocused” by competitorsFirm may be “outfocused” by competitors
Large competitor may set its sights on your niche marketLarge competitor may set its sights on your niche market
Preferences of niche market may change to match those of broad marketPreferences of niche market may change to match those of broad market
Major Risks Involved With a FocusedDifferentiation Business Level StrategyMajor Risks Involved With a Focused
Differentiation Business Level Strategy
Ch4-43
Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
CostLeadership
Differen-tiation
Differen-tiation
Generic Business Level StrategiesGeneric Business Level Strategies
Focused Differen-
tiation
Focused Differen-
tiation
Focused Low CostFocused
Low Cost
Integrated Low Cost/
Differentiation
Integrated Low Cost/
Differentiation
Uniqueness
Ch4-44
Firms using an Integrated Strategy may:Firms using an Integrated Strategy may:
Integrated Low Cost/Differentiation StrategyIntegrated Low Cost/Differentiation Strategy
Utilize Flexible Manufacturing Systems to create differentiated products at low costsUtilize Flexible Manufacturing Systems to create differentiated products at low costs
Adapt more quicklyAdapt more quickly
Learn new skills and technologiesLearn new skills and technologies
Leverage core competencies through Information Networks across multiple business unitsLeverage 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
Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs
Ch4-45
Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise
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
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 StrategyIntegrated Low Cost/Differentiation Strategy
Ch4-46
Southwest AirlinesSouthwest Airlines
Integrated Low Cost/Differentiation StrategyIntegrated Low Cost/Differentiation Strategy
Use a single aircraft model(Boeing 737)
Use secondary airports
Fly short routes
15 minute turnaround time
No meals
No reserved seats
No travel agent reservations
Low Cost
Focus on customer satisfactionFocus on customer satisfaction
New flight services for business travelers(phones and faxes)
New flight services for business travelers(phones and faxes)
High level of employee dedicationHigh level of employee dedication
DifferentiationDifferentiation
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