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This document outlines generic business level strategies and the value chain activities that are common for pursuing a cost leadership or differentiation strategy. It discusses four generic business level strategies - cost leadership, differentiation, focused low cost, and focused differentiation - defined by their source of competitive advantage and target market scope. For a cost leadership strategy, the key is achieving the lowest costs in the industry. Common value chain activities include efficient scale, process technology investments, and minimizing overhead. For a differentiation strategy, the focus is on creating unique product attributes that allow premium pricing. Common activities include new product R&D, quality control, and customer service. The document notes effective strategies can remain profitable even in unattractive industry environments.
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- 1. Business-Level Strategy: How dowe compete?
- 2. Generic Business LevelStrategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Narrow Target Market Cost Leadership Uniqueness
- 3. Generic Business LevelStrategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Narrow Target Market Uniqueness Cost Leadership Differentiation
- 4. Generic Business LevelStrategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Narrow Target Market Uniqueness Cost Leadership Differentiation Focused Low Cost Focused Differentiation
- 5. Generic Business LevelStrategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Narrow Target Market Uniqueness Cost DifferenLeadership tiation Integrated Low Cost/ Differentiation Focused Focused DifferenLow Cost tiation
- 6. Profit = (P– C) × Q
- 7. The Experience Curve TheExperience Curve The “Law of Experience” 1994 1995 Cost per unit of output The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. 1996 1997 1998 Cumulative Output 1999 2000
- 8. Examples of ExperienceCurves Examples of Experience Curves 75% 100K 200K 500K 1,000K Accumulated unit production (millions) UK refrigerators, 1957-71 Price Index 50 100 200 300 1960 Yen 15K 20K 30K Japanese clocks & watches, 1962-72 70% slope 5 10 50 Accumulated units (millions)
- 9. Choices that DriveCosts Economies of scale Product features Asset utilization Performance Capacity utilization pattern Mix & variety of products - Seasonal, cyclical Interrelationships - Order processing and distribution Value chain linkages - Advertising & Sales - Logistics & Operations Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation
- 10. Value Chain ofFirm Activities Firm Infrastructure Human Resource Management Technological Development M A R G IN M Service A R G IN Marketing & Sales Outbound Logistics Operations Inbound Logistics Procurement
- 11. Value Creating Activitiescommon to a Inbound Cost Leadership Business Level Strategy Logistics Inbound Logistics Support Activities Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Located in Close Proximity with Suppliers Primary Activities
- 12. Value Creating Activitiescommon to a Operations Cost Leadership Business Level Strategy Effective Training Programs to Improve Worker Efficiency and Effectiveness Human Resource ManagementAsset Timing of Purchases Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Technological Development M A RG Policy Choice of Frequent Evaluation Processes to Procurement Plant Technology IN Monitor Suppliers’ Performances Organizational Learning Primary Activities R G IN Products Priced to Generate Sales Volume M A Policy Choice of Efficient Order Plant Technology Sizes Organizational Small, Highly Trained Sales Learning Force Service Outbound Logistics Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Inbound Logistics Support Activities Firm Efficient Plant Scale Infrastructure to Minimize Mfg. Costs Relatively Few Management Layers to Reduce Overhead
- 13. Value Creating Activitiescommon to a Outbound Cost Leadership Business Level Strategy Logistics Delivery Schedule that Reduces Costs M Human Resource ManagementSelection of Low A R Cost Transport G Technological Development Carriers IN Efficient Order Frequent Evaluation Processes to Procurement Monitor Suppliers’ Performances Sizes Efficient Order Sizes Interrelationships with Sister Units Primary Activities National Scale Advertising R G IN Generate Sales Volume M A Selection of Low Cost Transport Carriers Effective Product Interrelationship Installations to s Reduce Frequency with Sister and Severity Units Products Priced to of Recalls Marketing & Sales Service Delivery Schedule Small, Highly that Reduces Trained Sales Costs Force Outbound Outbound Logistics Logistics Support Activities Firm Infrastructure
- 14. Value Creating Activitiescommon to a Marketing Cost Leadership Business Level Strategy & Sales Human Resource Management Technological Development Primary Activities Small, Highly Trained Sales Force M Products Priced A to GenerateR Sales G Volume IN M A R G IN National Scale Advertising Marketing & Sales Marketing & Sales Service Outbound Logistics Operations Procurement Inbound Logistics Support Activities Firm Infrastructure
- 15. Human Resource Effective Product Installationsto M Management Reduce A RG Recalls Technological Development IN Primary Activities R G IN M A Marketing Service & Sales Service Outbound Logistics Procurement Inbound Logistics Operations Support Activities Value Creating Activities common to a Cost Leadership Business Level Strategy Service Firm Infrastructure
- 16. Value Creating Activitiescommon to a Cost Leadership Business Level Strategy Support Activities Firm Infrastructure Human Resource Management Technological Development M A RG IN Primary Activities Frequent Evaluation Processes to Monitor Suppliers’ Performances M A Systems and Procedures to Find the Lowest Cost Products to Purchase Raw Materials R G IN Procurement Marketing & Sales Service Outbound Logistics Inbound Logistics Operations Procurement Procurement
- 17. Value Creating Activitiescommon to a Cost Leadership Business Level Strategy Support Activities Firm Infrastructure M A RG Human Resource Management Technological Development IN Primary Activities M A Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes R G IN Marketing & Sales Outbound Logistics Easy-to-Use Manufacturing Technologies Operations Inbound Logistics Technological Development Service Procurement
- 18. Value Creating Activitiescommon to a Cost Leadership Business Level Strategy Support Activities Firm Infrastructure M A RG Human Resource Management Technological Development IN Primary Activities M A Service Marketing & Sales Effective Training Programs to Improve Worker Efficiency and Effectiveness Outbound Logistics Operations Inbound Logistics Consistent Policies to Reduce Turnover Costs R G IN Human Procurement Resource Management
- 19. Value Creating Activitiescommon to a Cost Leadership Business Level Strategy M A RG Human Resource Management Technological Development Firm Infrastructure Primary Activities IN R G IN M A Service Relatively Few Management Layers to Reduce Overhead Marketing & Sales Simplified Planning Procurement Practices to Reduce Planning Costs Outbound Logistics Inbound Logistics Cost Effective MIS Systems Operations Support Activities Firm Infrastructure
- 20. Effective Cost Leaderscan remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Threat of Substitute Products Bargaining Power of Buyers
- 21. Effective Cost Leaderscan 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”
- 22. Effective Cost Leaderscan remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can mitigate Buyer Power by: * Driving prices far below competitors may cause exit and shift power back to firm Bargaining Power of Buyers
- 23. Effective Cost Leaderscan remain profitable even when the Five Forces appear unattractive Threat of Substitute Products Threat of New Entrants Well positioned relative to Substitutes in order to: * Make investments to create substitutes first * Buy patents developed by potential substitutes * Lower prices to maintain value position Bargaining Power of Buyers
- 24. Effective Cost Leaderscan remain profitable even when the Five Forces appear unattractive Bargaining Power of Suppliers Threat of New Entrants Can mitigate Supplier Power by: * Low cost position makes them better able to absorb cost increases * More likely to make very large purchases Threat of which reduces chance of supplier power Substitute Products Bargaining Power of Buyers
- 25. Effective Cost Leaderscan remain profitable Competitors avoid even when the Five Forces appear unattractiveCost price wars with Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Threat of Substitute Products Leaders, which creates higher profits for entire industry Bargaining Power of Buyers
- 26. The Major Risks involved witha 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
- 27. Generic Business LevelStrategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Narrow Target Market Uniqueness Cost Leadership Differentiation
- 28. Differentiation Business LevelStrategy Key Criteria Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation
- 29. Drivers of Differentiation SomeExamples: Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information
- 30. Value Creating Activitiescommon to a Differentiation Business Level Strategy M A RG Human Resource Management Technological Development IN Primary Activities R G IN M A Service Marketing & Sales Outbound Logistics Operations Procurement Inbound Logistics Support Activities Firm Infrastructure
- 31. Value Creating Activitiescommon to a Inbound Differentiation Business Level Strategy Logistics Primary Activities IN M A R G IN M A RG Service Outbound Logistics of incoming raw Human Resource Management materials to minimize damage and improve the Technological Development quality of the final product Procurement Inbound Logistics Inbound Logistics Operations Support Activities Firm Infrastructure Superior handling
- 32. Value Creating Activitiescommon to a Operations Differentiation Business Level Strategy Human Resource Management Technological Rapid responses to customers Developmentunique manufacturing specifications M A RG IN Primary Activities R G IN M A Service Outbound Logistics Procurement Inbound Logistics Operations Operations Support Activities Firm Consistent manufacturing of Infrastructure attractive products
- 33. Value Creating Activitiescommon to a Differentiation Business LevelOutbound Strategy Logistics Accurate and responsive order Managementprocessing MA procedures R Primary Activities Rapid and timely product deliveries to customers IN R G IN Outbound Outbound Logistics Logistics Procurement G M A Technological Development Marketing & Sales Service Human Resource Inbound Logistics Operations Support Activities Firm Infrastructure
- 34. Value Creating Activitiescommon to a Marketing Differentiation Business Level Strategy & Sales Human Resource Management Technological Development Primary Activities Strong Coordination among functions in M A R&D, Marketing R and Product G Development IN Extensive personal relationships with buyers Marketing & Sales Marketing & Sales Service R G IN Premium Pricing M A Outbound Logistics Procurement Inbound Logistics Operations Support Activities Firm Infrastructure
- 35. Human Resource Complete field stockingof Management replacement parts Technological Development M A RG IN Primary Activities R G IN M A Marketing Service & Sales Service Outbound Logistics Procurement Inbound Logistics Operations Support Activities Value Creating Activities common to a Differentiation Business Level Strategy Service Firm Infrastructure
- 36. Value Creating Activitiescommon to a Differentiation Business Level Strategy Support Activities Firm Infrastructure M A RG Human Resource Management Technological Development IN Purchase of highest quality replacement parts Primary Activities R G IN Systems and procedures used to find the highest quality raw materials Located in Close Proximity with Suppliers M A Procurement Marketing & Sales Service Outbound Logistics Inbound Logistics Operations Procurement Procurement
- 37. Value Creating Activitiescommon to a Differentiation Business Level Strategy Support Activities Firm Infrastructure M A RG Human Resource Management Technological Development IN Procurement Marketing & Sales Service Primary Activities Strong capability in basic research R G IN Investments in technologies to produce highly differentiated products M A Coordination among R&D, marketing and product development Outbound Logistics Inbound Logistics Operations Technological Development
- 38. Value Creating Activitiescommon to a Differentiation Business Level Strategy Support Activities Firm Infrastructure Human Resource Management Technological Development M A RG IN Human Procurement Resource Management Primary Activities R G IN Superior personnel training M A Marketing & Sales Service Extensive use of subjective performance measures Outbound Logistics Inbound Logistics Operations Compensation programs which encourage worker creativity and productivity
- 39. Value Creating Activitiescommon to a Differentiation Business Level Strategy Human Resource Management Technological Development Firm Infrastructure Primary Activities M A RG IN R G IN A companywide emphasis on producing high quality products M A Outbound Logistics Inbound Logistics Operations Highly developed Information Systems to better Procurement understand customers’ purchasing preferences Marketing & Sales Service Support Activities Firm Infrastructure
- 40. Differentiation Business LevelStrategy 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 Caterpillar tractors Service buyers’ needs quickly anywhere in the world
- 41. Effective Differentiators canremain 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
- 42. Effective Differentiators canremain profitable even when the Five Forces appear unattractive Threat of New Entrants Can mitigate Buyer Power because: Well differentiated products reduce customer sensitivity to price increases Bargaining Power of Buyers
- 43. Effective Differentiators canremain profitable even when the Five Forces appear unattractive Threat of Substitute Products Threat of New Entrants Well positioned relative to Substitutes because: * Brand loyalty tends to reduce new product trial and brand switching Bargaining Power of Suppliers
- 44. Effective Differentiators canremain profitable even when the Five Forces appear unattractive Bargaining Power of Suppliers Threat of New Entrants Can mitigate Supplier Power by: * Absorbing price increases due to higher margins Well positioned relative to Substitutes because: * Passing on higher supplier prices Threat of Brand loyalty tends to * because buyers are brand loyal Substitute reduce new product trial and brand switching Products Bargaining Power of Suppliers
- 45. Effective Differentiators canremain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Buyers Rivalry Among Competing Firms in Industry Threat of Substitute Products Can fend off New Entrants because: Brand loyalty New products must surpass proven much overcomes products * Or be equal to performance price competition at lower prices * Bargaining Power of Suppliers
- 46. The Major Risks involved witha 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
- 47. Generic Business LevelStrategies Source of Competitive Advantage Cost Breadth of Competitive Scope Uniqueness Broad Target Market Cost Leadership Differentiation Narrow Target Market Focused Low Cost Focused Differentiation
- 48. Focused Business LevelStrategies 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 industry-wide competitors
- 49. Focused Business LevelStrategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies - Bang & Olufsen - Snap-On tools - IAMS * May be able to retrofit old factories to keep costs down * Minimize R&D costs by copying innovators Upscale electronic components High quality mechanics’ tools Premium pet foods
- 50. Focused Business LevelStrategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies * Focused Differentiators may thrive by selecting a small market that is underserved by large players Custom manufacturers of parts for Harley-Davidson motorcycles
- 51. Firm may be“outfocused” by competitors The Major Risks involved with a Focused Differentiation Business Level Strategy Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market
- 52. Generic Business LevelStrategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Narrow Target Market Uniqueness Cost DifferenLeadership tiation Integrated Low Cost/ Differentiation Focused Focused DifferenLow Cost tiation
- 53. Integrated Low Cost/DifferentiationStrategy 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
- 54. Integrated Low Cost/DifferentiationStrategy 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
- 55. Integrated Low Cost/DifferentiationStrategy 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)
- 56. What is theStrategy? Friendly Robotics