Chapter 4

Business-Level Strategy

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

2000 South-Western College Publishing

Strategic Inputs

Chapter 2 External Environment Strategic Intent Chapter 3 Internal Environment Strategic Mission

The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance
Chapter 12 Strategic Leadership Chapter 11 Structure & Control Chapter 13
Entrepreneurship

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

Strategic Actions

Chapter 7 Acquisitions & Restructuring

& 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

Narrow Target Market

Focused Low Cost

Focused Differentiation

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
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

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

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

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

Frequent Evaluation Processes to Procurement Monitor Suppliers Performances Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume National Scale Advertising

Operations

Outbound Logistics

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

Service

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

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

Firm Infrastructure Highly Efficient

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Systems to Link Effective Training Programs to Improve Worker Human Resource Management Suppliers Efficiency and Effectiveness Products with the Easy-to-Use Manufacturing Investments in Technology in order Firms Production Technologies to Reduce Costs Associated with Technological Development Manufacturing Processes Processes
Consistent Policies to Reduce Turnover Costs
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Procurement Monitor Suppliers Performances Located in Close

Support Activities

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

Service

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

Proximity with Small, Highly Sales Suppliers Trained 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
Cost Effective MIS Systems

Firm

Simplified Planning Practices to Reduce Planning Costs

Support Activities

Efficient Plant Scale to Minimize Infrastructure Mfg. Costs

Relatively Few Management Layers to Reduce Overhead

Consistent Policies to Reduce Turnover Costs

Human Resource Management Timing of Asset Technological Development

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

Purchases

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

Operations

Outbound Logistics

Located in Close Proximity with Suppliers

Inbound Logistics

Force

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

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Service

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

Organizational Small, Highly Effective Product Trained Sales Learning Installations to

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

Consistent Policies to Reduce Turnover Costs

Human Resource ManagementSelection of Low 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

Delivery Schedule that Reduces Costs Cost Transport Carriers

Easy-to-Use Manufacturing Technologies

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

Efficient Order Frequent Evaluation Processes to Procurement Monitor Suppliers Performances Sizes

Operations

Outbound Outbound Logistics 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

Service

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

Effective Product Interrelationships Installations to Reduce Frequency with Sister Units

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

Small, Highly Trained Sales Force Products Priced to Generate Sales Volume National Scale Advertising

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

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

Service

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

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

Firm Infrastructure

Simplified Planning Practices to Reduce Planning Costs

Relatively Few Management Layers to Reduce Overhead

Service

Support Activities

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 Service

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

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

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

Operations

Outbound Logistics

Procurement
Interrelationships with Sister Units

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

Frequent Evaluation National Scale Processes to Monitor Advertising Suppliers Performances

Primary Activities

Marketing & Sales

Inbound Logistics

Service

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

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

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

Frequent Evaluation Processes to Procurement Monitor Suppliers Performances Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume National Scale Advertising

Operations

Outbound Logistics

Easy-to-Use Manufacturing Technologies

Located in Close Proximity with Suppliers

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

Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

Interrelationships with Sister Units

Primary Activities

Marketing & Sales

Inbound Logistics

Technological Development

Service

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

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

Improve Worker Human Resourceto Management Efficiency and Effectiveness

Effective Training Programs

Easy-to-Use Manufacturing Technologies

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

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

Human Procurement Resource Management

Operations Outbound Logistics Marketing & Sales Service
Effective Product Effective Training Programs Installations to to Improve Worker Reduce Frequency and Severity Efficiency and Effectiveness Selection of Low Products Priced to of Recalls 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 Efficientto Plant Consistent Policies 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

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

Service

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

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 Product features

Asset utilization
Capacity utilization pattern - Seasonal, cyclical Interrelationships - Order processing and distribution

Performance
Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation

Value chain linkages - Advertising & Sales - Logistics & Operations

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
of Well positioned relative toThreat New Substitutes in order to: Entrants * Make investments to create
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

substitutes first Buy patents developed by potential substitutes

value position

* Lower prices to maintain

Bargaining Power of Buyers

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

Threat of Substitute Products

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

Bargaining Power of Buyers

Products

back to firm

Effective Cost Leaders can remain profitable even when Competitors avoid the Five Forces appear unattractive price wars with Cost Leaders, which Can mitigate Supplier Power by: Can frighten off New Entrants due Threat of to the need to: creates higher profits * Low cost position makes them Enter at Large Scale to be New * better able to absorb cost increases Cost Competitive for entire industry Entrants * More likely to make very large
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
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

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 Strong capability in basic research

Support Activities

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

Human Resource Management Technological Development

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 Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products

Purchase of highest quality Procurement replacement parts

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

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

Firm Infrastructure Superior handling

Extensive use of subjective rather than objective performance measures

A companywide emphasis on producing high quality products

of incoming raw Superior personnel materials to Human Resource Management training minimize damage Coordination among R&D, Investments in technologies that will Strong and improve the produce capability in product development and allow the firm to consistently Technological Development marketing highly differentiated products basic research quality of the final Systems and procedures used to find Purchase of highest quality product Procurement
Compensation programs intended to encourage worker creativity and productivity the highest quality raw materials Superior handling of incoming raw materials to minimize damage and improve the quality of the final product replacement parts

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

Service

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

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

rather than objective personnel Human Resource Management performance measures training

Consistent manufacturing of Infrastructure attractive products Extensive use of subjective Superior

A companywide emphasis on producing high quality products

Procurement replacement parts

Operations Outbound Logistics
Accurate and responsive order processing procedures

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

Consistent manufacturing of attractive products

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

Support Activities

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

Firm Infrastructure

A companywide emphasis on producing high quality products

Technological Development

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 Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products

Purchase of highest quality Procurement replacement parts Accurate and responsive order processing procedures

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

Service

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

Rapid and timely product deliveries to customers

Strong capability in basic research

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

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

Firm Infrastructure

A companywide emphasis on producing high quality products

Support Activities

marketing

Technological Development highly differentiated products

Consistent manufacturing of attractive products Accurate and responsive order processing procedures

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

Purchase of highest quality Procurement replacement parts

Extensive personal relationships with buyers Premium Pricing

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

Service

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

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

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 Service

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 Strong capability in basic research

Support Activities

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

Human Resource Management Technological Development

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 Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products

Purchase of highest quality Procurement replacement parts Procurement

Operations

Outbound Logistics

Procurement

Systems and procedures to customers unique used to find the highest manufacturing specifications quality raw materials

Rapid responses

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

Service

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 Strong capability in basic research

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 Procurement replacement parts 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

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

Marketing & Sales

Inbound Logistics

Technological Development

Primary Activities

Service

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 Strong capability in basic research

Support Activities

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

Human Resource Management Technological Development

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

Systems and procedures used to find the highest quality raw materials

Human Procurement Resource Management

Operations Outbound Logistics
Product Development

minimize damage and improve the quality of the final product

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

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

Accurate and responsive order processing procedures

Extensive useCoordinof Strong Complete Superior field ation among stocking of subjective performance personnel functions in R&D, replacement parts measuresMarketing and training

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 Strong capability in basic research

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

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

Service

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

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: to Bargaining * Absorbing price increases due Power of higher margins
Well positioned relative to Substitutes because:

Suppliers

* Passing on higher supplier prices loyalty tends to * Brand because buyers are brand loyal reduce new product trial
and brand switching

Threat of Substitute Products

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

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 products overcomes much * Or be equal to performance price competition at lower prices

Bargaining Power of Buyers

Rivalry Among Competing Firms in Industry

Bargaining Power of Suppliers

Well positioned relative to Substitutes because:

Brand loyalty tends to 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

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 Differentiation Focus on customer satisfaction High level of employee dedication

New flight services for business travelers (phones and faxes)

No travel agent reservations