1. 1
Business-Level Strategy
Business-level strategy: an
integrated and coordinated set
of commitments and actions the
firm uses to gain a competitive
advantage by exploiting core
competencies in specific product
markets
2. 2
Core Competencies and
Strategy
The resources and capabilities that have
been determined to be a source of
competitive advantage for a firm over its
rivals
An integrated and coordinated set of
actions taken to exploit core competencies
and gain a competitive advantage
Actions taken to provide value to customers
and gain a competitive advantage by
exploiting core competencies in specific,
individual product markets
Business-levelBusiness-level
strategystrategy
StrategyStrategy
CoreCore
competenciescompetencies
3. 3
Strategy
Fundamental constraints
• Scope
– What good or service to offer, to which
customers
• Value chain
– How and where to create the good or
service
– How to distribute the good or service in the
marketplace(s)
4. 4
Recall our value
creation model
Costs represent
specific investment
choices that
generate value
Costs represent
specific investment
choices that
generate value
7. 7
Source of competitive
advantage - Value chains
• Strategies create differences between the
firm’s position and its rivals
• Sources of differences? - perform activities
differently; perform different activities
• Two value-adding configurations (Porter,
1985)
– Low cost
– Differentiated
9. 9
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at
the lowest cost relative to
competitors with features that are
acceptable to customers
– relatively standardized products
– features acceptable to many
customers
– lowest competitive price
10. 10
Cost Leadership Strategy
Cost saving actions required by this strategy:
– building efficient facilities
– tightly controlling production costs and
overhead
– minimizing costs of sales, R&D and service
– building efficient manufacturing facilities
– monitoring costs of activities provided by
outsiders
– simplifying production processes
11. 11
Discretionary decisions
Product features,
performance
Mix & variety of
products
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training,
motivation
Cost Drivers
Major Cost Drivers
Economies of scale
Learning/Spillovers
Capacity utilization
Integration
Vertical Linkages
Timing
Location
Political/regulatory
Interrelationships
(corporate)
Implications?Implications?
13. 13
Questions Leading to
Lower Costs
1. How can an activity be performed
differently, eliminated, externalized?
2. How can linked value activities be
regrouped or reordered?
3. How can upstream/downstream
collaboration lower costs?
14. 14
Implementation Pitfalls
• Exclusive focus on Mfg
• Misunderstand drivers (ABC
useful)
• Failure to recognize/exploit
linkages (e.g., across the board cost
reductions)
• Contradictions – (e.g., gain mkt share
through ES but allow product clutter; cross
subsidies)
15. 15
Cost Leadership and
the Five Forces
• Rivalry - competitors avoid price wars with
cost leaders
• Buyers – shift demand to you, increase
market power
• Suppliers – increased market power, absorb
cost increases (low cost position)
• Entrants – entry barriers (scale, learning)
• Substitutes – reinvest econ profit to
maintain advantage
16. 16
Major Risks of Cost
Leadership Strategy
• There can only be one cost leader
• Technological change can eliminate
cost advantage
• Spillovers lead to imitation
• Efficiency focus may create blind
spots re: customer preferences
17. 17
Differentiation Strategy
An integrated set of actions designed by a
firm to produce or deliver goods or
services that customers perceive as
adding value
– price may exceed what the firm’s target
customers are willing to pay
– Non-commodity products
– customers value differentiated features
more than they value low cost
18. 18
Some Differentiation Themes
• Unique taste
– Dr. Pepper
• Multiple features
– Microsoft Windows and Office
• Wide selection and one-stop shopping
– Home Depot and Amazon.com
• Reliable, superior service
– FedEx, Ritz-Carlton
• Spare parts availability
– Caterpillar
19. 19
Themes
• Prestige
– Rolex
• Quality manufacturing, few defects
– Honda, Toyota
• Technological leadership
– 3M Corporation, Intel
• Top-of-the-line image
– Ralph Lauren, Kiton
20. 20
Differentiation Strategy
• Add downstream value
– lower buyer cost
– raise buyer performance
• Cost
– Add value to buyer’s value: reduce
downstream processing time, search time,
transaction costs, defect rates, direct costs,
learning curves, labor, space, installation,
etc. (e.g., CRM software)
21. 21
Factors That Drive
Differentiation
Value: Increase performance of buyer’s
value chain (or consumer perception)
• Unique features, performance
• Downstream channels (e.g., Catepillar dealer
network)
• New technologies
• Quality of inputs
• Skill or know-how
• Information
22. 22
Differentiation Strategy
Some differentiation actions required by
this strategy:
– develop new “systems” and processes
– signal and shape buyer perceptions
– quality focus
– capability in R&D
Implication - maximize human capital
contributions
23. 23
Facilities that
promote firm
image
Superior MIS—To integrate
value-creating activities to
improve quality
Widely respected
CEO enhances
firm reputation
Widely respected
CEO enhances
firm reputation
Provide training and
incentives to ensure a strong
customer service orientation
Programs to attract talented
engineers and scientists
Excellent applications
engineering support
Superior material handling
and sorting technology
Use of most prestigious outletsPurchase of high-quality
components to enhance
product image
Superior
material
handling
operations
to minimize
damage
Quick
transfer of
inputs to
manufactur-
ing process
Flexibility
and speed in
responding
to changes
in manu-
facturing
specs
Low defect
rates to
improve
quality
Accurate and
responsive
order
processing
Effective
product
replenish-
ment to
reduce
customer’s
inventory
Creative
and
innovative
advertising
programs
Fostering
of personal
relation-
ship with
key
customers
Rapid response
to customer
service
requests
Complete
inventory of
replacement
parts and
supplies
Firm
infrastructure
Human resource
management
Technology
development
Procurement
Firm
infrastructure
Human resource
management
Technology
development
Procurement
Inbound
logistics
Operations Outbound
logistics
Marketing
and sales
ServiceInbound
logistics
Operations Outbound
logistics
Marketing
and sales
Service
Value-Chain example:
Differentiation
24. 24
Differentiation and the
Five Forces
• Rivalry - brand loyalty to differentiated
products reduces price competition
• Buyers – differentiated products less price
elastic
• Suppliers – absorb price increases (higher
margins), pass along higher prices (buyer
loyalty)
• Entrants – must surpass proven products or
be equivalent at lower price
• Substitutes – diff raises switching costs
25. 25
Pitfalls of Differentiation
Strategies
• Differentiating on characteristics not
valued by buyers (e.g., HP)
• Over-differentiating
• Price premium is too high
• Failing to signal value
• Focusing on product instead of entire
value chain
26. 26
Focused Business-Level
Strategies
A focus strategy must exploit a narrow
target’s differences from the balance of
the industry by:
– isolating a particular buyer group
– isolating a unique segment of a
product line
– concentrating on a particular
geographic market
– finding their “niche”
27. 27
Factors Driving
Focus Strategies
• Large firms overlook small niches
• Firm may lack resources to compete in
the broader market
• May be able to serve a narrow market
segment more effectively than can
larger industry-wide competitors
• Focus may allow the firm to direct
resources to certain value chain
activities to build competitive advantage
28. 28
Major Risks of Focused
Strategies
• 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
29. 29
Advantages of Integrated
Strategy
A firm that successfully uses an integrated
cost leadership/differentiation strategy should
be in a better position to:
– adapt quickly to environmental changes
– learn new skills and technologies more
quickly
– effectively leverage its core competencies
while competing against its rivals
30. 30
Benefits of Integrated
Strategy
• Successful firms using this strategy
have above-average returns
• Firm offers two types of values to
customers
– some differentiated features (but less
than a true differentiated firm)
– relatively low cost (but now as low as
the cost leader’s price)
31. 31
Major Risks of Integrated
Strategy
• An integrated cost/differentiation
business level strategy often involves
compromises (neither the lowest cost
nor the most differentiated firm)
• The firm may become “stuck in the
middle” lacking the strong commitment
and expertise that accompanies firms
following either a cost leadership or a
differentiated strategy
32. 32
Rate of Profit
in Excess of the
Competitive Level
Industry
Attractiveness
Competitive
Advantage
Differentiation
Advantage
Cost
Advantage
Vertical Power
(buyer/seller)
Rivalry
Barriers to Entry
Brands
Product technology
Marketing
capabilities
Process technology
Plant size
Low-cost inputs
Firm size
Financial resources
Substitutability
Patents
Brands
Retaliatory
capability
Summary: Industry and FirmSummary: Industry and Firm
Effects on ProfitEffects on Profit
Notes de l'éditeur
ES: (a) Indivisibilities - Inputs are lumpy or non-rival in consumption their costs can be spread over a larger level of output resulting in lower unit costs. Such inputs include R&D and advertising. (b) Specialization - When scale increases, opportunities for specialization become available. (c) Lower input costs – e.g., volume discounts, lower transaction costs, reduced inventories and other similar cost efficiencies resulting from large scale of operations. (d) Automation - scale makes more efficient methods possible, e.g., production and distribution . (e) Learning - available in production and distribution processes involving high degrees of tacit knowledge.
DS: increased costs from increased scale, e.g., (a) Complexity - costs of coordination may increase more than proportionately or effectiveness may decrease. (b) Marketing and distribution - as scale increases, marketing and distributing goods in increasingly diverse and geographically dispersed markets may be necessary
Learning – high rate of spillover = industry advantage; low rate = firm advantage
Integration – implicit or explicit evaluation of make vs. buy decisions.
Linkages – interactions among activities ↑costa → ↓costb (invest in UPS scheduling/routing)
Timing – first mover advantage from lower brand diff. costs; late mover advantage from avoiding high mkt/prod dev costs
