CHAPTER
6
Business Strategy:
Differentiation, Cost
Leadership, and
Integration
Instructor:
Dr.Gehan Shanmuganathan
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Part 2 Strategy Formulation
6-2
LO 6-1 Define business-level strategy and describe how it
determines a firm’s strategic position.
LO 6-2 Examine the relationship between value drivers and differentiation
strategy.
LO 6-3 Examine the relationship between cost drivers and cost-leadership
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.
LO 6-5 Explain why it is difficult to succeed at an integration strategy.
LO 6-6 Evaluate value and cost drivers that may allow a firm to pursue an
integration strategy.
LO 6-7 Describe and evaluate the dynamics of competitive positioning.
6-3
ChapterCase 6 Trimming Fat at Whole Foods Market
• Whole Foods…Business Strategy Revitalization
 Started as small natural-foods store 1980
 Became market leader; differentiation through
organics and quality

Competitive advantage through 2008
• CEO John Mackey: Refocused Mission, Reduced Costs
6-4
Business-Level Strategy: How to Compete
for Advantage?
• Answer the “Who, What, Why, and How”
 Who - which customer segments to serve?
 What needs, wishes, desires will we satisfy?
 Why do we want to satisfy them?
 How will we satisfy customers’ needs?
• Details actions managers take in quest for
competitive advantage
 Single product or group of similar products
6-5
EXHIBIT 6.1
Industry and Firm Effects Jointly
Determine Competitive Advantage
6-6
Strategic Position
• Determined by Firm’s Business-Level Strategy
 Two primary competitive levers:
Value (V)
 Cost (C)

• Economic Value Created: (V-C)
 The greater (V-C) = Competitive Advantage
• Strategic Position Based on:
 Value creation
 Cost
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EXHIBIT 6.2 Strategic Position and Competitive Scope:
Generic Business Strategies
6-8
Value Drivers
• Product Features
• Customization
 Most important &
 Tailoring for specific
clearest drivers
 Unique product
features>> higher price
customers
 “Mass customization”

Threadless T-shirts
BMW M3
• Customer Service
 ID unmet customer
needs & satisfy them
Zappos online retailer
 Toyota Lexus brand


• Complements
 Add value when
consumed in tandem

DVR (i.e., Tivo)
6-9
STRATEGY HIGHLIGHT 6.1
Toyota: From “Perfect Recall”
to “Recall Nightmare”
• Toyota’s strategic challenges….
 Launched Lexus 1989

Luxury car segment dominated by Mercedes-Benz, BMW, Cadillac
 LS400 line required recall a little over a year after launch

Turned threat into opportunity to establish reputation for superior
customer service

Two years after launch Lexus ranked first on quality and customer
satisfaction by J.D. Powers
 2010 Toyota has largest recall in automotive history

Needed to exhibit superior customer responsiveness again

8 million vehicles recalled was much more challenging
1–10
6-10
EXHIBIT 6.4
Cost Drivers: Cost-Leadership
• Cost Leadership:
 Cost of input factors, economies of scale, and learning-curve and
experience-curve effects
 Competitive advantage = economic value created (V-C) > competitors

Walmart vs. Kmart

Dell vs. Compaq, Gateway, & HP
6-11
INTEGRATION STRATEGY: COST LEADERSHIP
AND DIFFERENTIATION
• Trade-offs between low cost & differentiation
• Value & Cost Drivers of Integration
 Quality

Can increase perceived value & lower cost (V-C)
 Economies of Scope

Starbucks adding hot tea to its menu
 Innovation

IKEA - stylist furniture in flat pack delivery
 Structure, Culture, & Routines
Ambidextrous organization – explore AND exploit
 Intel current and future products and services

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EXHIBIT 6.9
Value and Cost Drivers
6-13
The Dynamics of Competitive Positioning:
Apple, HP, and Dell
EXHIBIT 6.10
6-14
CHAPTERCASE 6 Consider This…
• Whole Foods continues to seek ways to differentiate
 2010 enhanced its “back to school” program
 300 salad bars in public schools within 50-mile radius of any Whole
Foods store
 2011 expanded to 500 elementary, middle, and high schools
across the U.S.
 Expanding in-store educational efforts with “wellness clubs”
1. What value drivers is Whole Foods using to remain differentiated
in the face of Walmart and others now selling organic foods?
2. Given the discussion in the ChapterCase about Whole Foods
trimming its cost structure, does the firm risk being “stuck in the
middle”? Why or why not?
3. What other methods could Whole Foods use to successfully drive
its business strategy?
Whole Foods – John Mackey Video
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