Diane M. Sullivan, Ph.D. 2015
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage
Sections modified from Gentner (2009)

 After collecting information about the internal and external environment, firms can select their business-level strategy
Insert figure 1.1 graphic

 Definition: integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
 In selecting a business-level strategy, a firm must determine
 Who are the customer groups to be served
 What needs those customers have that the firm seeks to satisfy
 How those needs can be satisfied (e.g., can the firm use core competencies to satisfy customer needs)

 Definition: 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
 Using a cost leadership strategy, a firm
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Produces no-frills, standardized products for typical customers
Focuses on efficiency so costs are lower than competitors’ costs
 Generally offers lower cost products with competitive levels of differentiation
 Examples : Big Lots Inc., Wal-Mart

Cost Effective
MIS Systems
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Management Layers to
Reduce Overhead
Consistent Policies to
Reduce Turnover Costs
Effective Training Programs to Improve Worker
Efficiency and Effectiveness
Easy-to-Use Manufacturing
Technologies
Investments in Technology in order to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to find the
Lowest Cost Producers to Purchase
Raw Materials
Frequent Evaluation Processes to
Monitor Suppliers’ Performances
Highly Efficient
Systems to Link
Suppliers’
Products with the
Firm’s Production
Processes
Efficient Plant
Scale to Minimize
Manufacturing
Costs
Delivery Schedule that Reduces
Costs
Timing of Asset
Purchases
Selection of Low
Cost Transport
Carriers
Policy Choice of
Plant Technology
Efficient Order
Sizes
Located in Close
Proximity with
Suppliers Organizational
Learning
Interrelationships with Sister Units
Small, Highly
Trained Sales
Force
National Scale
Advertising
Effective Product
Installations to
Reduce Frequency and Severity of Recalls
Primary Activities


 Cost reduction processes become obsolete due to competitor innovations
 Cost reduction processes come at the expense of necessary levels of differentiation
 The strategy is imitated too easily

 Definition: integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them
 Firms using differentiation strategy
 Provide products with different, valued features sold at a premium price
 Hinges on customers valuing differentiated features more than they value low price
 Firms should differentiate offerings on as many dimensions as possible

The less similarity to competitors’ products, the more buffered a firm is from competition
 Examples : Tiffany Jewelry, Apple, Lexus

Highly Developed Information
Systems to better understand customers’ purchasing preferences
Compensation programs intended to encourage worker creativity and productivity
A companywide emphasis on producing high quality products
Extensive use of subjective rather than objective performance measures
Superior personnel training
Coordination among R&D, product development and marketing
Investments in technologies that will allow the firm to consistently produce highly differentiated products
Strong capability in basic research
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Consistent manufacturing of attractive products
Rapid responses to customers unique manufacturing specifications
Accurate and responsive order processing procedures
Strong Coordination among functions in R&D,
Marketing and
Product
Development
Rapid and timely product deliveries to customers
Extensive personal relationships with buyers
Premium
Pricing
Complete field stocking of replacement parts
Primary Activities


 Customers decide that differences between differentiated and cost leader’s product not worth a higher price
 Competitors offer similar products at a lower cost
 Too high a price premium

Counterfeiters offer a cheap “knockoff” of a differentiated good or service (e.g., easily imitated)
 Too much differentiation

 Definition: The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment
 Firms choose a focus strategy to serve the needs of a specific customer segment or industry segment
 Examples
 A particular buyer group (such as youths or senior citizens)
 A different segment of a product line (such as products for professional painters or the do-it-yourself group), or
 A different geographic market (such as East or West in the U.S).
 2 types of focus strategies:
 Focused cost leadership strategy
 Example: IKEA
 Focused differentiation strategy
 Example: Babies R Us


 A competitor is able to focus on an even more narrowly defined market segment
 Industry-wide competitors decide to focus on specific customer segments—imitation
 The differences are reduced between the needs of a specific market segment and those of the rest of the industry


 Provide relatively low cost products with valued differentiated features
 Use primary and support activities to produce differentiated products at relatively low costs

 A firm produces products that lack sufficient low cost or differentiation

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• The firm may become “Stuck-in-the-Middle” lacking an expertise with either type of generic strategy
• When a firm’s products are too expensive to compete with low cost producer and too undifferentiated to provide the value offered by the differentiated producer

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What capabilities does your strategy require?
What are the benefits & limitations of those capabilities?
What resources are required to develop those capabilities?
Can you obtain an economic payback from developing those capabilities?
Timing your Capabilities:
– When will they be required?
– How long to develop?
– How temporal are they?
Capabilities & The Competition:
– What capabilities do your competitors have?
– What are they going to have?
– What do they believe they have?
– How will you counter them?

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A broad cost leader will attempt to be the low-cost producer in every segment served
Strive for good profit margins on all sales while keeping prices low for pricesensitive customers.
 Firm Profile:
– Capacity improvements are unlikely to be undertaken (may run overtime instead) unless at 200% capacity
– Pursue automation to increase margins in all segments (more automation in slower moving segments versus faster moving segments)
– Low R&D spending, while still keeping pace with the market preferences
– Low labor and material costs
– Prices lower than average
– Spends moderately on promotion and sales
– Investments will be financed primarily via bonds and stock issues as needed
– When cash allows, establish a dividend policy and begin to retire stock
– Focus on Market Share, Profits, ROE and Stock Price

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 A low-tech focused cost leader will seek to minimize costs through efficiency and expertise.
Products will be concentrated in the Traditional and Low-end segments
Firm Profile:
 Multiple product lines in low-end segments (Traditional and Low-end)
 Few or no products in other segments (allow products to migrate)
 Low R&D spending, while still keeping reasonable pace with the market
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
Low labor and material costs
Invests in automation (only after products positioned into their “forever” segments) will help manage labor costs and make it most efficient to run a second shift (which is preferred to capacity expansions)
 Prices will be lower than average
 Spends moderately on promotion and sales
 Investments will be financed primarily via bonds and stock issues as needed
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When cash allows, establish a dividend policy and begin to retire stock
Focus on Stock Price, ROE, ROS, and Profits

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A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise
Products will be allowed to age and change in appeal from High End, to
Traditional, and eventually Low End buyers (then they are retired)
Firm Profile:
 Minimum presence in “specialty” segments (Size & Performance)
 Low R&D spending (very little repositioning & new product every 2 years in high-end segment)
 Low material costs
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
Low labor costs
Invests in automation early in the product’s life-cycle
 Prices are lower than average
 Spends moderately on promotion and sales
 Investments financed through bonds and stock offerings as needed
 When cash allows, establish a dividend policy and begin to retire stock
 Focus on Stock Price, ROE, ROS and Profits

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A broad differentiator will seek to create maximum awareness and brand equity in every segment
It wants to be well known as a maker of high quality/highly desirable products
Firm Profile:
 High R&D spending to keep products fresh and at pace with market
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Maintains presence in all market segments
Capacity will be expanded as higher demand is generated, avoiding overtime
 Modest investments in automation after products well positioned but never at expense of repositioning
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Spends heavily on advertising and sales to create maximum awareness and accessibility
Prices are above average
 Investments are financed via stock issues and cash from operations as well as bonds as needed
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
When cash allows, establish a dividend policy and begin to retire stock
Focus on Market Share, Profits, ROA and Stock Price

 A high-tech differentiator seeks to be known as the top producer of the best performing state-of-the-art products in the High-end, Performance and Size segments
 Firm Profile:
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Multiple product lines in high-tech segments (High-end, Performance, & Size) achieved via harvesting Traditional and Low-end products and new products
High promotion & sales investments to create maximum awareness & accessibility
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High R&D expenditures to continually introduce new product lines and keep existing products fresh and with pace of the market
Capacity will be expanded as higher demand is generated, avoiding overtime
Price is above average
 Modest investments in automation after products well positioned but never at expense of repositioning
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
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Investments are financed via stock issues and cash from operations and bonds as needed
When cash allows, establish a dividend policy and begin to retire stock
Focus on ROA, Asset Turnover, and ROS

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A product life-cycle focused differentiator seeks to be known as the top producer of the best performing state-of-the-art products in High-end, Traditional & Low-end segments
Products will be repositioned into the segments, allowed to drift into the appropriate segments and/or newly created into the segments
Firm Profile:
 Minimum presence in Size & Performance segments (reposition them to Traditional)
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High promotion and sales investments to create maximum awareness and accessibility
High R&D expenditures to continually introduce new product lines and keep existing products fresh and with pace of the market
Price is above average


Capacity will be expanded as higher demand is generated, avoiding overtime
Modest investments in automation after products well positioned but never at expense of repositioning
 Investments are financed via stock issues and cash from operations as well as bonds as needed
 When cash allows, establish a dividend policy and begin to retire stock
 Focus on Stock Price, ROS, Asset Turnover, and ROA

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A broad cost leader will attempt to be the low-cost producer in every segment of the market. It will have good profit margins on all sales while keeping prices low for price-sensitive customers.
 A broad differentiator will seek to create maximum awareness and brand equity. It wants to be well known as a maker of high quality/highly desirable products.
Firm Profile:  Firm Profile:
– More likely to reposition products than introduce new ones to the market
– Capacity improvements are unlikely to be undertaken (may run overtime instead)
– Automation may be pursued to increase margins
– High R&D spending to keep products fresh
– Maintains a presence in all market segments
– Spends heavily on advertising and sales to create maximum awareness and accessibility
– Investments will be financed with debt and/or stock issues
– Tends to spend less on promotion and sales
– Focus on Market Share, Profits, and
Stock Price
ACHIEVES
– Prices tend to be higher
– Focus on Market Share, Profits, and Stock Price
BOTH

Automation & Capacity
Broad Cost Leader
Cost Leader with low-tech focus
Cost leader with product life-cycle focus
Segments R&D & Marketing
Cost Approaches
T, L, H, P, S
T and/or L with > 1 product in each segment
Below
Avg.
Invest
H

T

L
Broad Differentiator
Differentiator with hightech focus
Differentiator with product life-cycle focus
Differentiation Approaches
T, L, H, P, S
H, P, and/or S with > 1 product in segment(s)
H  T  L
Above
Avg.
Invest
Successful integrated
Stuck-in-the-middle
Integrated Approaches
? ? ? ? ?
? ? ? ? ?
Above
Avg.
Invest
Below
Avg.
Invest