Business-Level Strategy
Chapter Five
© 2006 by Nelson, a division of Thomson Canada Limited.
5-1
Strategic
Inputs
Chapter 4
Internal
Environment
Strat. Intent
The Strategic
Strat. Mission
Strategy Formulation
Chapter 55
Chapter
Bus.
Bus.–-Level
Level
Strategy
Strategy
Chapter 7
Chapter 6
Competitive Corp. - Level
Dynamics
Strategy
Chapter 9
Chapter 8
Acquisitions & International
Strategy
Restructuring
Strategic
Outcomes
Strategic Actions
Chapter 3
External
Environment
Chapter 2
Above Average
Returns
Chapter 10
Cooperative
Strategies
Chapter 1
Strategic
Competitiveness
.
Management
Process
.
Strategy Implementation
Chapter 11
Chapter 12
Corporate
Structure
Governance
& Control
Chapter 13 Chapter 14
Strategic Entrepreneurship
Leadership & Innovation
Feedback
© 2006 by Nelson, a division of Thomson Canada Limited.
5-2
Core Competency, Strategy and
Business Level Strategy
Core
Competency
Strategy
Business
Level
Strategy
The resources and capabilities that are
determined to be a source of competitive
advantage for a firm over its rivals.
An integrated & coordinated set of actions
taken to exploit core competencies & gain a
competitive advantage.
Actions taken to provide customers value
and gain a competitive advantage by
exploiting core competencies in specific,
individual product markets.
© 2006 by Nelson, a division of Thomson Canada Limited.
5-3
Key Issues of Business-level
Strategy
• What good or service to offer customers.
• How to manufacture or create the good or
service.
• How to distribute the good or service in the
marketplace.
© 2006 by Nelson, a division of Thomson Canada Limited.
5-4
The Central Role of Customers
In selecting a business-level strategy, the firm
determines
1. Who it will serve.
2. What needs those target customers have
that it will satisfy.
3. How those needs will be satisfied.
© 2006 by Nelson, a division of Thomson Canada Limited.
5-5
Basis for Customer Segmentation
Consumer Markets
1. Demographic factors (age, income, gender, 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
© 2006 by Nelson, a division of Thomson Canada Limited.
5-6
Basis for Customer Segmentation
Industrial Markets
1. End use segments (identified by NAIC code)
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
© 2006 by Nelson, a division of Thomson Canada Limited.
5-7
Generic Business Level Strategies
Source of Competitive Advantage
Breadth of
Competitive
Scope
Cost
Uniqueness
Broad
Target
Market
Cost
Leadership
Differentiation
Narrow
Target
Market
Focused
Cost
Leadership
Focused
Differentiation
© 2006 by Nelson, a division of Thomson Canada Limited.
5-8
Generic Business Level Strategies
Source of Competitive Advantage
Cost
Broad
Target
Market
Breadth of
Competitive
Scope
Uniqueness
Cost
Leadership
Narrow
Target
Market
© 2006 by Nelson, a division of Thomson Canada Limited.
5-9
Value Creating Activities Common to a
Cost Leadership Business Level Strategy
Human Resource Management
Technological Development
Service
Outbound
Logistics
Marketing
& Sales
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-10
Value Creating Activities common to a
Cost LeadershipInbound
Business Level Strategy
Logistics
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Management Layers
to Reduce Overhead
Firm Infrastructure
Support
Activities
Training Programs to
HighlyEffective
efficient
Improve
Worker
Efficiency and
Human Resource
Management
Effectiveness
systems
to link
Investments in Technology in order
suppliers’
prod.s
to Reduce
Costs Associated with
Technological
Development
Manufacturing Processes
with the
firm’s
Systems and Procedures to find
Frequent Evaluation Processes
the Lowest Cost Products
to production
to Monitor Suppliers’
Procurement
Purchase Raw Materials
Performances
Highly Efficient Efficient Plant
Delivery
Small, Highly
Effective Product
processes
Efficient Order
Sizes
Trained Sales
Force
Service
Installations to
Reduce
Frequency and
Selection of Low Products Priced Severity
Timing of Asset Cost Transport to Generate Sales of Recalls
Purchases
Carriers
Volume
Located in Close Policy Choice of
Proximity with
Plant Tech.
Suppliers
Organizational
Learning
Schedule that
Reduces Costs
Marketing
& Sales
Scale to Minimize Manufacturing Costs
Outbound
Logistics
Systems to Link
Suppliers’ Products with the
Firm’s Production Processes
Operations
Consistent Pol.
to Reduce
Turnover Costs
Easy-to-Use Manufacturing
Technologies
Inbound
Inbound
Logistics
Logistics
Support
Activities
Cost Effective
MIS Systems
National
Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-11
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Operations
Relatively Few
Simplified Planning Practices
Management Layers
to Reduce Planning Costs
to Reduce Overhead
Economies of
Effective Training
scale to reduce
Consistent Policies to
Programs
to
Improve
Human
Management
Reduce TurnoverResource
Costs
production
costs
Worker Efficiency and
Support
Activities
Effectivenessin Technology in
Investments
order to Reduce Costs
Associated with Manufacturing
Processes
Systems and Procedures to find the Lowest
Frequent Evaluation Processes
Cost Products to Purchase Raw Materials
to Monitor Suppliers’
Easy-to-Use Manufacturing
Technologies
Efficient Plant
Scale to
Minimize
Manufacturing
Costs
Timing of Asset
Purchases
production
facilities
Performances
Delivery
Small, Highly
Schedule that
Trained Sales
Reduces Costs Force
Outbound
Logistics
Highly Efficient
Systems to Link
Suppliers’ Products with the
Firm’s Production Processes
Inbound
Operations
Operations
Logistics
Procurementefficient-scale
Service
Technological Development
Construction of
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Effective Product
Installations to
Reduce
Selection of Low Products Priced Frequency and
Cost Transport to Generate Sales Severity
of Recalls
Carriers
Volume
Located in Close Policy Choice of Efficient Order
Proximity with
Plant Technology Sizes
Suppliers
Organizational
Learning
National
Scale
Advertising
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-12
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Management Layers
to Reduce Overhead
Firm Infrastructure
Cost Effective
MIS Systems
Delivery
schedule
that
Effective
Training
Programs
to
Consistent Policies to
reduces costs
Improve
Worker Efficiency and
Human
Management
Reduce TurnoverResource
Costs
Support
Activities
Effectiveness
Easy-to-Use Manufacturing
Technologies
Selection of low
Developmentcost transport
carriers
Technological
Efficient Order
Sizes
Marketing
& Sales
Located in Close Policy Choice of
Proximity with Plant Tech.
Suppliers
Organizational
Learning
Outbound
Outbound
Logistics
Logistics
Operations
Procurement
Service
Service
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to
Frequent
Frequent Evaluation
Evaluation Processes
Processes
find the Lowest Cost Products
to
Monitor
Suppliers’
to
Monitor
Suppliers’
to Purchase Raw Materials
Performances
Performances
Highly Efficient Efficient Plant
Delivery
Small, Highly
Effective Product
Systems to Link Scale to Minim- Schedule that
Trained Sales
Installations to
Suppliers’ Prod- ize Manufactur- Reduces Costs Force
Reduce
ucts with the
ing Costs
Frequency and
Selection of Low Products Priced
Firm’s Produc- Timing of Asset
Severity
Cost Transport to Generate Sales
tion Processes Purchases
of Recalls
Carriers
Volume
Inbound
Logistics
Support
Activities
Value Creating Activities common
to a
Outbound
Cost Leadership Business Level Strategy
Logistics
Efficient
order sizes
National
Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-13
Firm Infrastructure
Human Resource Management
Technological Development
Efficient Order
Sizes
Small, Highly
Trained Sales
Force
Products priced
to generate
sales volume
Effective Product
Installations to
Reduce
Selection of Low Products Priced Frequency and
Timing of Asset Cost Transport to Generate Sales Severity
of Recalls
Purchases
Carriers
Volume
Located in Close Policy Choice of
Proximity with
Plant Tech.
Suppliers
Organizational
Learning
Delivery
Schedule that
Reduces Costs
Marketing
Marketing
&&Sales
Sales
Efficient Plant
Scale to Minimize Manufacturing Costs
Operations
Inbound
Logistics
Highly Efficient
Systems to Link
Suppliers’ Products with the
Firm’s Production Processes
Outbound
Logistics
Procurement
Small, highly
trained sales
force
Service
Service
Simplified Planning Relatively Few
Practices to Reduce Management Layers
to Reduce Overhead
Planning Costs
Consistent Pol. to Reduce
Effective Training Programs to
Turnover Costs
Improve Worker Efficiency and
Effectiveness
Investments in Technology in order
Easy-to-Use Manufacturing
to Reduce Costs Associated with
Technologies
Manufacturing Processes
Systems and Procedures to find
Frequent Evaluation Processes to
the Lowest Cost Products to
Monitor Suppliers’ Performances
Purchase Raw Materials
Cost Effective
MIS Systems
Support
Activities
Support
Activities
Value Creating Activities common to a
Marketing
Cost Leadership Business Level Strategy
& Sales
National
Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-14
Cost Effective
MIS Systems
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Management Layers
to Reduce Overhead
Systems and Procedures to find
the Lowest Cost Products to
Purchase Raw Materials
Frequent Evaluation Processes to
Monitor Suppliers’ Performances
Effective Product
Installations to
Reduce
Selection of Low Products Priced Frequency and
Severity
Timing of Asset Cost Transport to Generate Sales
of Recalls
Carriers
Volume
Purchases
Located in Close Policy Choice of
Proximity with
Plant Tech.
Suppliers
Organizational
Learning
Delivery
Schedule that
Reduces Costs
Efficient Order
Sizes
Small, Highly
Trained Sales
Force
Marketing
& Sales
Efficient Plant
Scale to Minimize Manufacturing Costs
Outbound
Logistics
Inbound
Logistics
Highly Efficient
Systems to Link
Suppliers’ Products with the
Firm’s Production Processes
Operations
Procurement
Service
Service
Effective product
Effective Training Programs to Improve
Consistent Pol. to
installations to
Worker
Efficiency and Effectiveness
Human
Management
Reduce TurnoverResource
Costs
reduce
Investments
in
Technology
in order to Reduce
Easy-to-Use Manufacturing
Costs Associated with Manufacturing
recalls Processes
Technological Development
Technologies
Support
Activities
Support
Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Service
Firm Infrastructure
Service
National
Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-15
Cost Effective
MIS Systems
Support
Activities
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Management Layers
to Reduce Overhead
Firm Infrastructure
Consistent Pol. to
Reduce Turnover Costs
Effective Training Programs to Improve
Worker Efficiency and Effectiveness
Human Resource Management
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to find
Frequent Evaluation Processes
the Lowest Cost Products to
to Monitor Suppliers’
Purchase Raw Materials
Performances
Highly Efficient Efficient Plant
Delivery
Small, Highly
Effective Product
Systems to Link Scale to Minim- Schedule that
Trained Sales
Installations to
Suppliers’ Prod- ize Manufactur- Reduces Costs Force
Reduce
ucts with the
ing Costs
Selection of Low Products Priced Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
tion Processes Purchases
of Recalls
Carriers
Volume
Marketing
& Sales
Outbound
Outbound
Logistics
Logistics
Inbound
Operations
Operations
Logistics
Technological Development
Procurement
Procurement
Procurement
Procurement
Service
Service
Marketing
& Sales
Easy-to-Use Manufacturing
Technologies
Inbound
Logistics
Support
Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Systems
and procedures to
Frequent evaluation
Located in Close Policy Choice of Efficient Order National
Proximity
Plant Tech.
Sizes
Scale
find
thewith
lowest
cost products
processes to monitor
Suppliers
Advertising
Interrelationships suppliers’ performances
to purchaseOrganizational
raw materials
Learning
with Sister Units
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-16
Cost Effective
MIS Systems
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Management Layers
to Reduce Overhead
Firm Infrastructure
Support
Activities
Effective Training Programs to
Improve Worker Efficiency and
Effectiveness
Easy-to-Use Manufacturing
Investments in Technology in order
Technologies
to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to find
Frequent Evaluation Processes
the Lowest Cost Products to
to Monitor Suppliers’
Purchase Raw Materials
Performances
Highly Efficient Efficient Plant
Delivery
Small, Highly
Effective Product
Systems to Link Scale to Minim- Schedule that
Trained Sales
Installations to
Suppliers’ Prod- ize Manufactur- Reduces Costs Force
Reduce
Selection
of
Low
Products
Priced
ucts with the
ing Costs
Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
Carriers
Volume
tion Processes Purchases
of Recalls
Consistent Pol. to Reduce
Turnover Costs
Outbound
Logistics
Operations
Technological
Development
Technological
Development
Procurement
Service
Service
Human Resource Management
Easy-to-Use
manufacturing
technologies
Located in Close Policy Choice of
Proximity with
Suppliers
Plant Tech.
Organizational
Learning
Marketing
& Sales
Technological Development
Inbound
Logistics
Support
Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Investments in technology in order
to reduce costs associated with
manufacturing
processes
Efficient
Order National
Sizes
Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-17
Relatively Few
Management Layers
to Reduce Overhead
Effective Training Programs to
Consistent Pol.
Improve Worker Efficiency and
to Reduce
Effectiveness
Turnover Costs
Easy-to-Use Manufacturing
Investments in Technology in order
Technologies
to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to find
Frequent Evaluation Processes
the Lowest Cost Products to
to Monitor Suppliers’
Purchase Raw Materials
Performances
Highly Efficient Efficient Plant
Delivery
Small, Highly
Effective Product
Systems to Link Scale to Minim- Schedule that
Trained Sales
Installations to
Suppliers’ Prod- ize Manufactur- Reduces Costs Force
Reduce
ucts with the
ing Costs
Selection of Low Products Priced Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
tion Processes Purchases
of Recalls
Carriers
Volume
Cost Effective
MIS Systems
Simplified Planning
Practices to Reduce
Planning Costs
Firm Infrastructure
Human Resource
Resource Management
Management
Human
Support
Support
Activities
Activities
Technological
Technological Development
Development
Located in Close Policy Choice of
Proximity with
Plant Tech.
Suppliers
Organizational
Learning
Service
Intense & effective training
programs to improve worker
efficiency and effectiveness
Efficient Order
Sizes
Marketing
& Sales
Consistent policies to
reduce turnover costs
Outbound
Logistics
Operations
HumanProcurement
Resource Management
Procurement
Inbound
Logistics
Support
Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
National
Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-18
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Management Layers
to Reduce Overhead
Firm
Firm Infrastructure
Infrastructure
Cost Effective
MIS Systems
Support
Activities
Effective Training Programs to
Improve Worker Efficiency and
Effectiveness
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to find
Frequent Evaluation Processes
the Lowest Cost Products to
to Monitor Suppliers’
Purchase Raw Materials
Performances
Highly Efficient Efficient Plant
Delivery
Small, Highly
Effective Product
Systems to Link Scale to Minim- Schedule that
Trained Sales
Installations to
Suppliers’ Prod- ize Manufactur- Reduces Costs Force
Reduce
ucts with the
ing Costs
Selection of Low Products Priced Frequency and
Firm’s Produc- Timing of Asset Cost Transport to Generate Sales Severity
tion Processes Purchases
of Recalls
Carriers
Volume
Consistent Pol.
to Reduce
Turnover Costs
Easy-to-Use Manufacturing
Technologies
Human Resource Management
Firm Infrastructure
Technological
Development
Located in Close Policy Choice of
Proximity with
Plant Tech.
Suppliers
Organizational
Learning
Efficient Order
Sizes
Service
Marketing
& Sales
Relatively few
Simplified planning
Procurement
managerial layers to
policies to reduce
reduce overhead costs planning costs
Outbound
Logistics
Inbound
Logistics
Cost effective
MIS systems
Operations
Support
Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
National
Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-19
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 raw material
New advertising media
New distribution channel
Direct sales in place
of indirect sales
Forward integration
Backward integration
Alter location relative
to suppliers or buyers
© 2006 by Nelson, a division of Thomson Canada Limited.
5-20
Cost Leadership Strategy and the
Five Forces of Competition
Rivalry with Existing
Competitors
Five Forces of
Competition
Bargaining Power
of Suppliers
Can use cost leadership strategy
to advantage since:
 competitors avoid price wars
with cost leaders, creating
higher profits for the entire
industry
© 2006 by Nelson, a division of Thomson Canada Limited.
5-21
Cost Leadership Strategy and the
Five Forces of Competition
Bargaining Power of Buyers
(Customers)
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate buyers’ power by:
Driving prices far below
competitors and cause exit and
shift power back to firm.
© 2006 by Nelson, a division of Thomson Canada Limited.
5-22
Cost Leadership Strategy and the
Five Forces of Competition
Bargaining Power of Suppliers
Can mitigate suppliers’ power by:
Five Forces of
Competition


Bargaining Power
of Suppliers
being able to absorb cost
increases due to low cost position
being able to make very large
purchases, reducing chance of
supplier using power
© 2006 by Nelson, a division of Thomson Canada Limited.
5-23
Cost Leadership Strategy and the
Five Forces of Competition
Threat of New Entrants
Five Forces of
Competition
Bargaining Power
of Suppliers
Can frighten off new entrants due to:
 their need to enter on a large scale
in order to be cost competitive
 the time it takes to move down the
learning curve
© 2006 by Nelson, a division of Thomson Canada Limited.
5-24
Differentiation Strategy and the Five
Forces of Competition
Threat of Substitute Products
Five Forces of
Competition
Well positioned relative to substitutes
because:

Bargaining Power
of Suppliers
brand loyalty to a differentiated product
tends to reduce customers’ testing of
new products or switching brands.
© 2006 by Nelson, a division of Thomson Canada Limited.
5-25
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.
© 2006 by Nelson, a division of Thomson Canada Limited.
5-26
Generic Business Level Strategies
Source of Competitive Advantage
Cost
Broad
Target
Market
Breadth of
Competitive
Scope
Uniqueness
Cost
Differentiation
Leadership
Narrow
Target
Market
© 2006 by Nelson, a division of Thomson Canada Limited.
5-27
Differentiation strategy
“An integrated set of actions designed by a
firm to produce or deliver goods or
services that customers perceive as being
different in ways that are important to
them.”
© 2006 by Nelson, a division of Thomson Canada Limited.
5-28
How to Obtain a Differentiation
Advantage
Control if needed
Reconfigure to
maximize
Cost Drivers Value Chain
• Lower buyers’ costs
• Raise performance of product or service
• Create sustainability through:
- customer perceptions of uniqueness
- customer reluctance to switch to non-unique product
© 2006 by Nelson, a division of Thomson Canada Limited.
5-29
Value CreatingInbound
Activities common to a
Logistics Level Strategy
Differentiation Business
A companywide emphasiis on producing high
quality products
Highly Developed Information Extensive use of subjective Superior
personnel
Systems to better understand rather than objective
performance measures
training
customers’ purchasing preferences
Support
Activities
Firm Infrastructure
Superior handling of
incoming
raw
Human Resource
Management
materials to
minimize
damage
Technological
Development
and improve the
quality of the final
Procurement
product
Service
Outbound
Logistics
Marketing
& Sales
Operations
Coordination among R&D,
Investments in tech. that will allow Strong
product development and
capability in
the firm to consistently produce
marketing
basic research
highly differentiated products
Systems and procedures used to
Purchase of highest quality
find the highest quality raw
replacement parts
materials
Strong Coordin- Complete field
Consistent
Accurate and
ation among
manufacturing responsive
stocking of
functions in
of attractive
order
replacement
R&D, Marketing parts
products
processing
and Product
procedures
Development
Rapid
Extensive
responses to
Rapid and timely personal
customers
relationships
product
unique
with buyers
manufacturing deliveries to
Premium
customers
specifications
Pricing
Inbound
Logistics
Support
Activities
Compensation programs
intended to encourage
worker creativity & prod.
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-30
Highly Developed Information
Systems to better understand
customers’ purchasing preferences
Compensation programs
intended to encourage
worker creativity & prod.
Firm Infrastructure
manufacturing of
attractive products
Human Resource Management
Coordination among R&D,
product development and
marketing
Strong
capability in
basic research
Rapid responses
Technological Development
Rapid
responses to
customers
unique
manufacturing
specifications
Outbound
Logistics
products
Marketing
& Sales
Operations
Operations
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
Service
to customers
Procurementunique
Strong Coordin- Complete field
Consistent
Accurate and manufacturing
ation among
manufacturing responsive specifications
stocking of
functions in
of attractive
order
replacement
Systems and procedures used to find
the highest quality raw materials
Inbound
Logistics
Support
Activities
Value Creating Activities common to a
Operations
Differentiation Business
Level Strategy
Consistent
R&D, Marketing parts
and Product
Development
Extensive
Rapid and timely
personal
product
relationships
deliveries to
with buyers
customers
Premium
Pricing
processing
procedures
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-31
A companywide emphHighly Developed Information
asiis on producing high
Systems to better understand
customers’ purchasing preferences quality products
Compensation programs
Extensive use of subjective Superior
intended to encourage
rather than objective
personnel
worker creativity & prod.
performance measures
training
Firm Infrastructure
Accurate and
responsive
Human Resource Management
order
Coordination among R&D,
Investments in tech. that will allow Strong
processing
product development and
the firm to consistently produce
capability in
Technological
Development
marketing
highly
differentiated products
procedures
basic research
Systems and procedures used to find the
Purchase of highest quality
highest quality raw materials
replacement parts
Rapid
responses to
customers
unique
manufacturing
specifications
Accurate and
responsive
order
processing
procedures
Outbound
Marketing
Logistics
& Sales
Consistent
manufacturing
of attractive
products
Operations
Inbound
Logistics
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
Rapid and timely
product
deliveries
Strong CoordinComplete
field
ation among
stocking of
functions in to customers
replacement
Outbound
Logistics
Procurement
Service
Support
Activities
Support
Activities
Outbound
Value Creating Activities common
to a
Differentiation Business LevelLogistics
Strategy
R&D, Marketing parts
and Product
Development
Extensive
Rapid and timely personal
product
relationships
deliveries to
with buyers
customers
Premium
Pricing
Primary Activities
© 2006 by Nelson, a division of Thomson Canada Limited.
5-32
Differentiation Strategy and the Five
Forces of Competition
Rivalry Among Competing Firms
Can defend against competition because:
Five Forces of
Competition

brand loyalty to differentiated product
offsets price competition
Bargaining Power
of Suppliers
© 2006 by Nelson, a division of Thomson Canada Limited.
5-33
Differentiation Strategy and the Five
Forces of Competition
Bargaining Power of Buyers
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate buyer power because:
 well differentiated products
reduce customer sensitivity to
price increases
© 2006 by Nelson, a division of Thomson Canada Limited.
5-34
Differentiation Strategy and the Five
Forces of Competition
Bargaining Power of Suppliers
Five Forces of
Competition
Can mitigate suppliers’ power by:


Bargaining Power
of Suppliers
absorbing price increases due to higher
margins
passing along higher supplier prices
because buyers are loyal to differentiated
brand
© 2006 by Nelson, a division of Thomson Canada Limited.
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Differentiation Strategy and the Five
Forces of Competition
Threat of New Entrants
Five Forces of
Competition
Can defend against new entrants
because:

Bargaining Power
of Suppliers

new products must surpass proven
products or,
new products must be at least
equal to performance of proven
products, but offered at lower
prices
© 2006 by Nelson, a division of Thomson Canada Limited.
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Differentiation Strategy and the Five
Forces of Competition
Threat of Substitute Products
Five Forces of
Competition
Well positioned relative to
substitutes because:

Bargaining Power
of Suppliers
brand loyalty to a differentiated
product tends to reduce customers’
testing of new products or
switching brands
© 2006 by Nelson, a division of Thomson Canada Limited.
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Major Risks of a Differentiation
Business Level Strategy
Customers may decide that the
differentiation between the
differentiator’s product and the cost
leaders price is too large.
A firm’s means of differentiation may
cease to provide value for which
customers are willing to pay.
The means of uniqueness may no longer
be valued by customers.
© 2006 by Nelson, a division of Thomson Canada Limited.
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Generic Business Level Strategies
Source of Competitive Advantage
Breadth of
Competitive
Scope
Cost
Uniqueness
Broad
Target
Market
Cost
Leadership
Differentiation
Narrow
Target
Market
Focused
Cost
Leadership
Focused
Differentiation
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Focus Strategies
Focus strategies are an integrated set of
actions designed to produce or deliver
goods or services that serve the needs of
a particular competitive segment.
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Focused Business Level Strategies
Focused
Business Level
Strategies involve
the same basic
approach as Broad
Market Strategies.
However...
Opportunities may exist because:
 Firm may lack resources to
compete industry wide.
 Large firms may overlook small
niches.
 The firm may be able to serve a
narrow market segment more
effectively than industry wide
competitors.
 Focus can allow you to direct
resources to certain value chain
activities to build competitive
advantage.
© 2006 by Nelson, a division of Thomson Canada Limited.
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*
Focused Business Level Strategies
Focused
Business Level
Strategies involve
the same basic
approach as Broad
Market Strategies.
*
Differentiated features
with low cost products
*
Minimize R&D costs
by copying innovators
- Ikea
Good design & function
at low prices
- Purdy’s Chocolates
High quality chocolates
© 2006 by Nelson, a division of Thomson Canada Limited.
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Focused Business Level Strategies
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.
© 2006 by Nelson, a division of Thomson Canada Limited.
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*
an
Major Risks Involved With a Focused
Differentiation Business Level Strategy
Firm may be “out focused” by competitors.
Large competitor may set its sights on your
niche market.
Preferences of niche market may change to
match those of broad market.
© 2006 by Nelson, a division of Thomson Canada Limited.
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Broad
Target
Market
Breadth of
Competitive
Scope
Narrow
Target
Market
Uniqueness
Cost
DifferenLeadership
tiation
Integrated
Low Cost/
Focused
Focused
Differentiation
Cost
DifferenLeadership
tiation
© 2006 by Nelson, a division of Thomson Canada Limited.
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Integrated Low Cost/Differentiation
Firms using an Integrated Strategy may:
Adapt more quickly
Learn new skills and technologies
Leverage core competencies while
competing against it’s rivals
May utilize Flexible Manufacturing Systems to
create differentiated products at low costs
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Flexible Manufacturing Systems
• Information networks
• Total Quality Management Systems
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Total Quality Management - TQM
1. Meeting customer expectations while striving
to exceed them.
2. Focusing on work activities to drive out waste.
3. Focus on “Continuous Improvement”.
4. Develop the flexibility to spot opportunities to
simultaneously increase differentiation and /or
drive out costs.
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