Business-Level

Business-Level Strategy:
Strategy:
How
How do
do we
we compete?
compete?
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost
Target
Market Leadership
Breadth of
Competitive
Scope
Narrow
Target
Market
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost
Target Leadership Differentiation
Market
Breadth of
Competitive
Scope
Narrow
Target
Market
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost
Target Leadership Differentiation
Market
Breadth of
Competitive
Scope
Focused Low Focused
Narrow
Target Cost Differentiation
Market
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of Integrated
Competitive Low Cost/
Scope Differentiation
Narrow Focused Focused
Target
Market Low Cost Differen-
tiation
Profit = (P – C) × Q
 The
The Experience
Experience Curve
Curve

The “Law of Experience”

1994
The unit cost value added to a standard
product declines by a constant %
1995 (typically 20-30%) each time cumulative
output doubles.
Cost per
unit of
1996
output
1997
1998
1999 2000

Cumulative Output
 Examples
Examples of
of Experience
Experience Curves
Curves

Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71

50 100 200 300

20K 30K

Price Index
1960 Yen

75%
15K

70% slope

100K 200K 500K 1,000K 5 10 50

Accumulated unit production Accumulated units
(millions) (millions)
 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
Value Chain of Firm Activities

Firm Infrastructure
Human Resource Management M
A
R
G
Technological Development IN
Procurement

M Service
Operations

Marketing
Outbound
Logistics

Logistics
Inbound

& Sales

IN
G
R
A
 Value Creating Activities common to a
Inbound
Cost Leadership Business Level Strategy
Logistics
Highly Efficient
Systems to Link
Activities
Support

Suppliers’
Products with the
Firm’s Production
Processes
Located in Close
Proximity with
Suppliers
Logistics
Inbound

Primary Activities
 Value Creating Activities common to a
Operations
Cost Leadership Business Level Strategy
Efficient Plant
Relatively Few
Firm Scale to Minimize
Infrastructure
Management Layers to
Reduce Overhead
Mfg. Costs
Activities
Support

Human Resource Management

Effective Training Programs
to Improve Worker M
Timing of Asset Efficiency and Effectiveness A
Purchases
Investments in Technology in order
RG
Technological Development to Reduce Costs Associated with IN
Policy Choice of
Manufacturing Processes

Procurement PlantProcesses
Frequent Evaluation Technology
to
Monitor Suppliers’ Performances

Efficient Plant Delivery Schedule Organizational

Small, Highly

Service
Scale to Minimize that Reduces Learning
Trained Sales
Operations

Manufacturing
Outbound
Costs Force
Logistics
Inbound

Costs
Logistics

IN
Selection of Low Products Priced to
Timing of Asset Cost Transport Generate Sales

G
Purchases Carriers Volume

R
A
Policy Choice of Efficient Order

M
Plant Technology Sizes

Organizational
Learning

Primary Activities
 Value Creating Activities common to a
Cost Leadership Business LevelOutbound
Strategy
Logistics
Firm Infrastructure Delivery Schedule
that Reduces Costs
Activities
Support

M
Human Resource ManagementSelection of Low
A
R
Cost Transport G
Technological Development Carriers IN
Efficient Order
Procurement
Frequent Evaluation Processes to
Monitor Suppliers’ Performances
Sizes
Delivery Schedule Small, Highly Effective Product
Interrelationship

Service
that Reduces
Outbound Trained Sales Installations to
s Reduce
with Frequency
Sister
Outbound
Costs Force

Marketing
Logistics and Severity

& Sales
Logistics Products Priced toUnits

IN
Selection of Low of Recalls
Cost Transport Generate Sales

G
Carriers Volume

R
A
Efficient Order National Scale

M
Sizes Advertising

Interrelationships
with Sister Units

Primary Activities
 Value Creating Activities common to a
Marketing
Cost Leadership Business Level Strategy
& Sales
Firm Infrastructure Small, Highly
Trained Sales Force
Activities
Support

Human Resource Management M

Products Priced
A
to GenerateRSales
Technological Development G
Volume IN
Procurement National Scale
Advertising

Service
Operations

Outbound

Marketing

Marketing
Logistics

& Sales
Logistics
Inbound

& Sales

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Service
Effective Product
Activities

Installations to M
Support

Human Resource Management

Reduce A
Recalls RG
Technological Development IN
Procurement

Service
Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Activities
Support

Human Resource Management M

A
RG
Technological Development IN
Procurement
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
Procurement

G
R
Systems and Procedures to Find Frequent Evaluation

A
Processes to Monitor

M
the Lowest Cost Products to
Purchase Raw Materials Suppliers’ Performances

Primary Activities
 Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Activities
Support

Human Resource Management M

A
RG
Technological Development IN
Procurement
Technological Development

Service
Operations

Outbound

Marketing
Logistics

Logistics
Inbound

Easy-to-Use Investments in Technology in

& Sales

IN
Manufacturing order to Reduce Costs

G
R
Technologies Associated with Manufacturing

A
Processes

M
Primary Activities
 Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Activities

M
Support

Human Resource Management A

RG
Technological Development IN
Human Procurement
Resource Management
Consistent Policies to Effective Training Programs

Service
Reduce Turnover Costs to Improve Worker
Operations

Outbound

Marketing
Logistics

Efficiency and Effectiveness

Logistics
Inbound

& Sales

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Activities

M
Support

Human Resource Management A

RG
Firm Infrastructure
Technological Development IN
Cost Effective Simplified Planning Relatively Few
MIS Systems Procurement
Practices to Reduce Management Layers
Planning Costs to Reduce Overhead

Service
Operations

Marketing
Outbound
Logistics

& Sales
Logistics
Inbound

IN
G
R
A
M
Primary Activities
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive

Threat of
New
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive

Threat of Can frighten off New Entrants

New
due to the need to:
Entrants

* 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 mitigate Buyer Power by: Bargaining

Power of
* Driving prices far below competitors Buyers
may cause exit and shift power back
to firm
 Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive

Threat of
Threat of New
Substitute Entrants
Products

Well positioned relative to Bargaining

Substitutes in order to: Power of
Buyers
* Make investments to create
substitutes first
* Buy patents developed by
potential substitutes

* Lower prices to maintain

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

Threat of
Bargaining New
Power of Entrants
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
Threat of
which reduces chance Substitute
of supplier power
Products
 Effective Cost Leaders can remain profitableavoid
Competitors
even when the Five Forces appear unattractive
price wars with Cost
Leaders, which
Threat of creates higher profits
New
Entrants for entire industry

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
 Dramatic technological
change could take away
your cost advantage
The Major
Risks involved
with a Competitors may learn
Cost Leadership how to imitate Value Chain
Business Level
Strategy

Focus on efficiency could cause

Cost Leader to overlook changes
in customer preferences
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of
Competitive
Scope
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
 Drivers of Differentiation

Some Examples:

Unique product features

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

Detailed information
 Value Creating Activities common to a
Differentiation Business Level Strategy
Firm Infrastructure
Activities
Support

Human Resource Management M

A
RG
Technological Development IN
Procurement

Service
Operations

Marketing
Outbound
Logistics

& Sales
Inbound

Logistics

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
DifferentiationInbound
Business Level Strategy
Logistics
Firm Infrastructure
Superior handling
of incoming raw
Activities

M
Support

Human Resource Management

materials to A
minimize damage RG
Technological
and Development
improve the IN
quality of the
Procurement
final product

Service
Operations

Outbound
Logistics
Inbound

Logistics
Inbound

Logistics

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Operations
Differentiation Business Level Strategy
Consistent
Firm Infrastructure
manufacturing of
attractive products
Activities
Support

Human Resource Management M

Rapid responses to A
customers unique
RG
Technological Development
manufacturing IN
specifications
Procurement

Service
Operations
Operations

Outbound
Logistics
Inbound

Logistics

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Differentiation Business LevelOutbound
Strategy
Logistics
Firm Infrastructure Accurate and
responsive order
Activities
Support

Human Resource Managementprocessing MA

procedures R G
Technological Development IN
Rapid and timely
Procurement product deliveries
to customers

Service
Outbound
Operations

Outbound

Marketing
Logistics

Logistics
Inbound

& Sales
Logistics

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Marketing
Differentiation Business Level Strategy
& Sales
Firm Infrastructure Strong
Coordination
Activities
Support

Human Resource Management M

among functions in
A
R&D, Marketing
R
and Product G
Technological Development Development IN
Extensive personal
relationships with
Procurement buyers

Service
Premium
Operations

Outbound

Marketing

Marketing
Pricing
Logistics
Inbound

& Sales
Logistics

& Sales

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Differentiation Business Level Strategy
Firm Infrastructure
Service
Complete field
stocking of
Activities
Support

Human Resource Management M

replacement A
parts RG
Technological Development IN
Procurement

Service
Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Differentiation Business Level Strategy
Firm Infrastructure
Activities
Support

Human Resource Management M

A
RG
Technological Development IN
Procurement
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
Procurement

G
R
Systems and procedures Purchase of highest Located in

A
M
used to find the highest quality replacement Close Proximity
quality raw materials parts with Suppliers

Primary Activities
 Value Creating Activities common to a
Differentiation Business Level Strategy
Firm Infrastructure
Activities
Support

Human Resource Management M

A
RG
Technological Development IN
Procurement
Technological Development

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Coordination among Logistics
Investments in technol- Strong

IN
R&D, marketing and ogies to produce highly capability in

G
R
product development differentiated products basic research

A
M
Primary Activities
 Value Creating Activities common to a
Differentiation Business Level Strategy
Firm Infrastructure
Activities

M
Support

Human Resource Management A

RG
Technological Development IN
Human Procurement
Resource Management
Compensation programs Extensive use of Superior

Service
which encourage worker subjective performance personnel
Operations

Outbound

Marketing
Logistics

creativity and productivity measures training

Inbound

& Sales
Logistics

IN
G
R
A
M
Primary Activities
 Value Creating Activities common to a
Differentiation Business Level Strategy
Firm Infrastructure
Activities

M
Support

Human Resource Management A

RG
Firm Infrastructure
Technological Development IN
Highly developed Information A companywide emphasis
Systems to better Procurement
understand on producing high quality
customers’ purchasing preferences products

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
G
R
A
M
Primary Activities
 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

Caterpillar tractors
anywhere in the world
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive

Threat of Can fend off New Entrants

New
because:
Entrants

* 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 mitigate Buyer Power because: Bargaining

Power of
Well differentiated products reduce Buyers
customer sensitivity to price increases
 Effective Differentiators can remain profitable
even when the Five Forces appear unattractive

Threat of
Threat of New
Substitute Entrants
Products

Well positioned relative to Bargaining

Power of
Substitutes because: Suppliers
* Brand loyalty tends to
reduce new product trial
and brand switching
 Effective Differentiators can remain profitable
even when the Five Forces appear unattractive

Threat of
Bargaining New
Power of Entrants
Suppliers

Bargaining
Can mitigate Supplier Power by: Power of
Suppliers
* Absorbing price increases due to
higher margins
Well positioned relative to
Passing
Substitutes
* because:on higher supplier prices
Threat of
* because buyers are brand
Brand loyalty tends to
reduce new product trial and
loyal
Substitute
brand switching Products
 Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Can fend off New Entrants because:
Threat of
*
Brand loyalty
New products must
New overcomes much
surpass proven products
Entrants * Or be equal to performance
price
at lowercompetition
prices

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Buyers in Industry Suppliers

Threat of
Substitute
Products
 Customers may decide
that the cost of
“uniqueness” is too great
The Major
Risks involved
with a Competitors may learn
Differentiation how to imitate Value Chain
Business Level
Strategy

The means of uniqueness

may no longer be valued
by customers
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of
Competitive
Scope
Narrow Focused Focused
Target
Market Low Cost Differen-
tiation
 Focused Business Level Strategies
Focused However.....
Business Level
Opportunities may exist because:
Strategies
involve the Large firms may
same basic
approach as
* overlook small niches

Broad Market Firm may lack resources

Strategies * to compete industry wide

* May be able to serve a narrow market segment more

effectively than industry-wide competitors
 Focused Business Level Strategies
Focused
Business Level May be able to retrofit old
Strategies * factories to keep costs down
involve the
same basic
approach as * Minimize R&D costs by
copying innovators
Broad Market
Strategies
- Bang & Olufsen Upscale electronic components

- Snap-On tools High quality mechanics’ tools

- IAMS Premium pet foods

 Focused Business Level Strategies
Focused
Business Level
Strategies * Focused Differentiators
may thrive by selecting a
involve the small market that is
same basic underserved by large
approach as players
Broad Market
Strategies

Custom manufacturers of parts for

Harley-Davidson motorcycles
 Firm may be “outfocused”
by competitors

The Major
Risks involved Large competitor may
with a Focused set its sights on your
Differentiation niche market
Business Level
Strategy

Preferences of niche market

may change to match those of
broad market
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of Integrated
Competitive Low Cost/
Scope Differentiation
Narrow Focused Focused
Target
Market Low Cost Differen-
tiation
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
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)
 What is the Strategy?

Friendly Robotics