Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 5 – Business-Level Strategy
Business-Level Strategy
 Key Terms
Strategy – integrated
and coordinated set of commitments
–
and actions the firm uses to gain a
competitive advantage by exploiting
core competencies in specific product
markets
 Business-Level
Types of Business-Level Strategy
Features of the Five Business-Level Strategies
 Generic, can be used across industries
 Two distinct types of competitive
advantage:
Low Cost
 Differentiation

 Choice of scope:
 Broad
 Narrow (niche)
Cost Leadership Strategy
 Key Terms
Leadership Strategy – integrated
set of actions designed to produce or
deliver goods or services with
features that are acceptable to
customers at the lowest cost, relative
to competitors
 Cost
Cost Leadership Strategy –
Implementation
 No-frill, standardized goods
 Continuously reduce costs of
value chain activities
Value-Creating Activities Associated
with Cost Leadership Strategy
Cost Leadership Strategy and the Five
Forces of Competition
 Low-cost position is a valuable defense against rivals
 Powerful customers can demand reduced prices
 Costs leaders are in a position to absorb supplier
price increases and relationship demands, and to
force suppliers to hold down their prices
 Continuously improving levels of efficiency and cost
reduction can be difficult to replicate and serve as
significant entry barriers to potential competitors
 Cost leaders hold an attractive position in terms of
product substitutes, with the flexibility to lower prices
to retain customers
How can Low Costs protect against…?
 Low cost leadership does not eliminate any of
these forces, it just allows the low costs firm
to more easily deal with these forces, or offset
the power of these forces, and potentially,
remain profitable.
Strategy and Organizational Structure
 Specialization
 Centralization
 Formalization
Cost Leadership Strategy and Structure
Simple reporting relationships
 Few decision-making and authority layers
 Centralized corporate staff
 Strong operational focus on process
improvements
 Low-cost culture
 Centralized staff decision-making authority
 Jobs specialization
 Highly formalized rules and procedures

900
800
700
600
500
Sonic - 1100 units
Church's - 1400 units
400
300
200
100
0
Personnel
SGA
Risks of Cost Leadership Strategy
 Processes
can become obsolete
 Focus
on cost reductions can come at
the expense of understanding
customer perceptions and needs
 Strategy
could be imitated, requiring
the firm to increase the value offered
to retain customers
Differentiation Strategy
 Key Terms
Strategy – 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
 Differentiation
Differentiation
 Offer attributes that customers want, and are willing
to pay for. Leads to premium price, higher volume,
loyalty
 Marginal revenue must exceed the costs of
differentiation
PERCEIVED VALUE
versus
INCREMENTAL COSTS
Differentiation Strategy –
Implementation (cont.)
 Unusual features
 Responsive
customer service
 Rapid product
innovations
 Technological
leadership
 Perceived prestige
and status
 Different tastes
 Engineering design
 Performance
Differentiation (cont.)
 What firms pursue differentiation?
 How or on what basis do they achieve differentiation?
Starbuck’s Differentiation
 4 Tablespoons of $10 bag = 40 cents
Three cups
 Double-Tall Latte = $3.22
 Double Shot Espresso = $1.85
 $3.22 - $1.85 = $1.37 for steamed milk



20 seconds to steam milk
$1.37 * 3 * 60 = $246 a hour to steam milk
 Customers “allow” Starbucks to draw interest in their smart-
cards.
 Millions of dollars annually on the float
 “You are one of us”
 “Collectible”
 Pretax profit margins of 10.5%
Value-Creating Activities Associated
with the Differentiation Strategy
Differentiation Strategy and Structure
 Complex and flexible reporting
relationships
 Cross-functional product development
teams
 Strong focus on marketing and product
R&D
 Development-oriented culture
 Decentralized decision making
 Broad job descriptions
 Informal rules and procedures
Risks of Differentiation Strategy







quick imitation
no value in uniqueness
over differentiation
 cell phones
premium price or costs are costs too high
poorly understood/changing customer needs
 Minivan, FAO Schwartz
costs/price become more important than
uniqueness
unwillingness to offer true differentiation
To introduce his beer,
Coors often gave free
sample to gold
miners.
 ..because you can’t sell beer to minors.
Differentiation Strategy and the Five
Forces of Competition
 Customer loyalty provides the most valuable
defense against rivals
 Uniqueness products reduce customer
sensitivity to raised prices
 High margins (for differentiated products)
insulate from supplier influence
 Customer loyalty and product uniqueness serve
as significant entry barriers
 Firms with customers loyal to their products are
positioned effectively against product substitutes
How can Differentiation protect against…?
Differentiation does not eliminate any of these
forces, it just allows the differentiated firm to
more easily deal with these forces, or offset
the power of these forces, and potentially,
remain profitable.
Can you differentiate……?
Can you differentiate…..?
 Salt?
Can you differentiate…..?
 Deodorant
Strong enough for
a man, ….
But made for a
woman
Ph balanced too?????
Can you differentiate…..?
 Water
 Evian spelled backwards - naïve
 Coincidence? I think not…..
Now, I am going to do a card trick.
I am going to read your mind.
You are going to see a series of cards.
You are going to choose one card.
Once you select your card, clear your mind,
and think only of that card.
Are you ready to pick a card?
Pick a card.
Did you pick a card?
Think of it now.
I hear you.
And now, I will remove your card.
Your card is gone….yes?
Focus Strategy
 Key Terms
Strategy – integrated set of
actions designed to produce or
deliver goods or services to a narrow
target consumer based on specific
differences in the market
 Focus
Focus Strategy – Market Segments
 Buyer group
 Product line segment
 Geographic market
Focus Strategy – Reasons
 Large firms may overlook small niches
 Firms may lack resources to compete in
the broader market
 Firms may be able to serve a narrow
market segment more effectively than
larger, industry-wide competitors
 Firms may direct resources to certain
value chain activities to build competitive
advantage
Focus Strategy – Types
 Focused cost leadership strategy
 Focused differentiation strategy
Risks of Differentiation Strategy
 A competitor may be able to focus on a more
narrowly defined competitive segment and
"outfocus” the focuser
 A company competing on an industry-wide
basis may decide that the market segment
served by the focus strategy firm is attractive
and worthy of competitive pursuit
 The needs of customers within a narrow
competitive segment may become more
similar to those of industry-wide customers as
a whole
Integrated Cost
Leadership/Differentiation Strategy
 Key Terms
 Integrated
Cost Leadership/
Differentiation Strategy – 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
Risks of Integrated Strategy
 Failure to establish a leadership position
can result in a firm being "stuck in the
middle," unable to create value, and
unable to earn above-average returns