Chapter 6 Business Strategy: Differentiation, Cost Leadership, and Integration Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1 6-‹#› 2 Chapter Outline 6.1 Business-Level Strategy: How to Compete for Advantage Strategic Position Generic Business Strategies 6.2 Differentiation Strategy: Understanding Value Drivers 6.3 Cost-Leadership Strategy: Understanding Cost Drivers 6.4 Business-Level Strategy and the Five Forces: Benefits and Risks Cost-Leadership Strategy: Benefits and Risks Differentiation Strategy: Benefits and Risks 6.5 Integration Strategy: Combining Cost Leadership and Differentiation Value and Cost Drivers of Integration Strategy Integration Strategy Gone Bad: “Stuck in the Middle” 6.6 Implications for the Strategist 6-‹#› 3 “The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market” Who – which customer segments – will we serve? What customer needs, wishes, and desires will we satisfy? Why do we want to satisfy them? How will we satisfy our customers’ needs? 6.1 Business-Level Strategy: How to Compete for Advantage BUSINESS-LEVEL STRATEGY 6-‹#› 4 6-‹#› HOW TO COMPETE FOR ADVANTAGE 6-‹#› 6 DIFFERENTIATION COST LEADERSHIP Create higher value by delivering products/services with unique features Create similar value by delivering products/services at a lower cost and lower prices than competitors INTEGRATION Combination of differentiation and cost-leadership strategies 6-‹#› Exhibit 6.1 Industry and Firm Effects Jointly Determine Competitive Advantage 6-‹#› 8 The greater the economic value created (V – C), the greater the firm’s competitive advantage. A firm’s business-level strategy determines its strategic position. Competitive advantage more likely when firms: perform similar activities differently, or perform different activities than their rivals. Strategic Position 6-‹#› 9 Exhibit 6.2 Strategic Position and Competitive Scope: Generic Business Strategies There can be important trade-offs between strategic positions 6-‹#› 10 Aims to create higher value by delivering products / services with unique features (while keeping the firm’s cost structure at the same or similar levels) Focus of competition: Unique product features New product launches Marketing and promotion Competitive advantage is achieved as long as economic value created (V-C) is greater than its competitors 6.2 Differentiation Strategy 6-‹#› 11 Exhibit 6.3 Differentiation Strategy: Achieving Competitive Advantage 6-‹#› 12 Product Features Most important & clearest drivers Unique product features >> higher price Customer Service Focus on unmet customer needs & satisfy them Complements Add value when consumed as a bundle 6.2 Differentiation Strategy: Understanding Value Drivers ...

1. Chapter 6
Business Strategy:
Differentiation, Cost Leadership, and Integration
Copyright © 2015 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
1
6-‹#›
2
Chapter Outline
6.1 Business-Level Strategy: How to Compete for Advantage
Strategic Position
Generic Business Strategies
6.2 Differentiation Strategy: Understanding Value Drivers
6.3 Cost-Leadership Strategy: Understanding Cost Drivers
6.4 Business-Level Strategy and the Five Forces: Benefits and
Risks
Cost-Leadership Strategy: Benefits and Risks
Differentiation Strategy: Benefits and Risks
6.5 Integration Strategy: Combining Cost Leadership and

2. Differentiation
Value and Cost Drivers of Integration Strategy
Integration Strategy Gone Bad: “Stuck in the Middle”
6.6 Implications for the Strategist
6-‹#›
3
“The goal-directed actions managers take in their quest for
competitive advantage when competing in a single product
market”
Who – which customer segments – will we serve?
What customer needs, wishes, and desires will we satisfy?
Why do we want to satisfy them?
How will we satisfy our customers’ needs?
6.1 Business-Level Strategy: How to Compete for Advantage
BUSINESS-LEVEL STRATEGY
6-‹#›
4
6-‹#›
HOW TO COMPETE FOR ADVANTAGE

3. 6-‹#›
6
DIFFERENTIATION
COST LEADERSHIP
Create higher value by delivering products/services with unique
features
Create similar value by delivering products/services at a lower
cost and lower prices than competitors
INTEGRATION
Combination of differentiation and cost-leadership strategies

4. 6-‹#›
Exhibit 6.1 Industry and Firm Effects Jointly Determine
Competitive Advantage
6-‹#›
8
The greater the economic value created (V – C), the greater the
firm’s competitive advantage.
A firm’s business-level strategy determines its strategic
position.
Competitive advantage more likely when firms:
perform similar activities differently,
or perform different activities than their rivals.
Strategic Position
6-‹#›
9

5. Exhibit 6.2 Strategic Position and Competitive Scope: Generic
Business Strategies
There can be important trade-offs between strategic positions
6-‹#›
10
Aims to create higher value by delivering products / services
with unique features (while keeping the firm’s cost structure at
the same or similar levels)
Focus of competition:
Unique product features
New product launches
Marketing and promotion
Competitive advantage is achieved as long as economic value
created (V-C) is greater than its competitors
6.2 Differentiation Strategy
6-‹#›
11
Exhibit 6.3 Differentiation Strategy: Achieving Competitive
Advantage

6. 6-‹#›
12
Product Features
Most important & clearest drivers
Unique product features >> higher price
Customer Service
Focus on unmet customer needs & satisfy them
Complements
Add value when consumed as a bundle
6.2 Differentiation Strategy: Understanding Value Drivers
6-‹#›
13
Aims to create similar value by delivering products / services at
a lower cost (and lower prices) than competitors
Focus of competition:
Reduce cost in manufacturing products or delivering service
Optimize all of its value chain activities to achieve low-cost
position

7. Competitive advantage is achieved as long as economic value
created (V-C) is greater than its competitors
6.3 Cost-Leadership Strategy
6-‹#›
14
Exhibit 6.4 Cost-Leadership Strategy: Achieving Competitive
Advantage
6-‹#›
15
6.3 Cost-Leadership Strategy: Understanding Cost Drivers
Cost of input factors
Economies of scale
Learning-curve effects
Experience-curve effects
6-‹#›

8. 16
Exhibit 6.5 Economies of Scale, Minimum Efficient Scale, and
Diseconomies of Scale
6-‹#›
17
Economies and Diseconomies
of Scale
Economies of Scale – output up, cost per unit down
Spread fixed costs over large output
Specialized systems
Physical properties
Diseconomies of Scale
Complexity of management or physical limits
6-‹#›
18
Learning Curves

9. Steeper curve = more learning
Examples: Aircraft manufacturing, cardiac surgeons
Experience Curves
Combine economy of scale & learning curves.
Scale comes down a given learning curve.
Technology allows movement to steeper curve.
Combination can leapfrog in competitive advantage.
Walmart high volumes & technology leadership
Cost Drivers: Learning & Experience Curves
6-‹#›
19
Exhibit 6.6 Gaining Competitive Advantage Through
Leveraging Learning & Experience Curve Effects
6-‹#›
20
Cost-Leadership
Benefit: protected from competitors if price war
Risk: new entrant arrives and new capabilities needed
6.4 Business-Level Strategy and the Five Forces: Benefits and
Risks

10. Differentiation
Benefit: reduced rivalry & high cost of imitation
Risk: might overshoot features needed & vulnerable to price-
sensitive customers
6-‹#›
21
Firms skilled in both lowering costs and uniqueness
Difficult because the firm manages internal value chain
activities that are fundamentally different from one another
Competitive advantage is achieved as long as economic value
created (V-C) is greater than its competitors
6.5 Integration Strategy: Combining Cost Leadership and
Differentiation
6-‹#›
22
Exhibit 6.8 Integration Strategy vs. “Stuck in the Middle”
6-‹#›

11. 23
Exhibit 6.9 Target’s Attempt at Achieving Competitive
Advantage by Pursuing an Integration Strategy
6-‹#›
24
6.5 Integration Strategy:
Understanding Value and Cost Drivers
Quality
Can increase perceived value & lower cost (V − C)
Economies of Scope
Starbucks adding hot tea to its menu
Customization
Threadless.com, Toyota all mass customization
Innovation
IKEA - stylist furniture in flat pack delivery
Structure, Culture, & Routines
Ambidextrous organization – Intel
6-‹#›
25
6.6 Implications for the Strategist

12. Well-formulated and implemented strategies = Enhanced
chances of superior performance
Integration strategies successful only if:
An innovation that reconciles the trade-offs, such as Toyota
lean-manufacturing approach in ‘80s & ‘90s
Goal is to stay on the productivity frontier.
6-‹#›
26
Take-Away Concepts
LO 6-1
Define business-level strategy and describe how it determines a
firm’s strategic position.
Business-level strategy determines a firm’s strategic position in
its quest for competitive advantage when competing in a single
industry or product market.
Strategic positioning requires that managers address strategic
trade-offs that arise between value and cost, because higher
value tends to go along with higher cost.
Differentiation and cost leadership are distinct strategic
positions.
Besides selecting an appropriate strategic position, managers
must also define the scope of competition − whether to pursue
a specific market niche or go after the broader market.
6-‹#›

13. 27
Take-Away Concepts
LO 6-2
Examine the relationship between value drivers and
differentiation strategy.
The goal of a differentiation strategy is to increase the
perceived value of goods and services so that customers will
pay a higher price for additional features.
In a differentiation strategy, the focus of competition is on
value-enhancing attributes and features, while controlling costs.
Some of the unique value drivers managers can manipulate are
product features, customer service, customization, and
complements.
Value drivers contribute to competitive advantage only if their
increase in value creation (ΔV) exceeds the increase in costs
(ΔC).
6-‹#›
28
Take-Away Concepts
LO 6-3
Examine the relationship between cost drivers and the cost-
leadership strategy.
The goal of a cost-leadership strategy is to reduce the firm’s
cost below that of its competitors.
In a cost-leadership strategy, the focus of competition is
achieving the lowest possible cost position, which allows the
firm to offer the lowest price while maintaining acceptable
value.
Some of the unique cost drivers that managers can manipulate
are the cost of input factors, economies of scale, and learning-

14. and experience-curve effects.
No matter how low the price, if there is no acceptable value
proposition, the product or service will not sell.
6-‹#›
29
Take-Away Concepts
The five forces model helps managers use generic business
strategies to protect themselves against the industry forces that
drive down profitability.
Differentiation and cost-leadership strategies allow firms to
carve out strong strategic positions, not only to protect
themselves against the five forces, but also to benefit from them
in their quest for competitive advantage.
Exhibit 6.7 details the benefits and risks of each business
strategy.
LO 6-4
Assess the benefits and risks of cost-leadership and
differentiation business strategies vis-à-vis the five forces that
shape competition.
6-‹#›
30
Take-Away Concepts

15. To address the trade-offs between differentiation and cost
leadership at the business level, managers may leverage quality,
economies of scope, innovation, and the firm’s structure,
culture, and routines.
The trade-offs between differentiation and low cost can either
be addressed at the business level or at the corporate level.
LO 6-5
Evaluate value and cost drivers that may allow a firm to pursue
an integration strategy.
6-‹#›
31
Take-Away Concepts
LO 6-6 Explain why it is difficult to succeed at an integration
strategy.
A successful integration strategy requires that trade-offs
between differentiation and low cost be reconciled.
Integration strategy often is difficult because the two distinct
strategic positions require internal value chain activities that are
fundamentally different from one another.
When firms fail to resolve strategic trade-offs between
differentiation and cost, they end up being “stuck in the
middle.” They then succeed at neither strategy, leading to a
competitive disadvantage.
6-‹#›
32