Chapter 4
Business Level Strategy
Pages 96 - 125
Business Level Strategy
How are we going to compete in our
industry/segment?
Improving the firm’s competitive
position
Competitive advantages are the
single most dependable contributor
to above-average profitability
How do these Firms Compete?
How do these Firms Compete?
How do these Firms Compete?
How do these Firms Compete?
Porter’s Generic Strategies
 Two fundamental issues
 Competitive advantage - low cost vs.
uniqueness
 Competitive Scope- broad based vs.
narrow
 Pursuit of the generic strategies
provides protection from each of the five
forces
Porter’s Generic Strategies
Low Cost
Competitive
Advantage
Uniqueness
Porter’s Generic Strategies
Broad
Narrrow
Competitive Scope
Porter’s Generic Strategies
Low Cost
Overall Low-Cost
Focused Low-Cost
Broad Differentiation
Focused Differentiation
Competitive
Advantage
Uniqueness
Broad
Narrow
Competitive Scope
Porter’s Generic Strategies
NOT one of Porter’s Generic Strategies
Low Cost
Integrated
Low Cost/
Differentiation
Competitive
Advantage
Uniqueness
Broad
Narrow
Competitive Scope
Porter’s Generic Strategies
Low Cost
Competitive
Advantage
WalMart
Domino’s
Uniqueness
Broad
Narrow
Competitive Scope
Porter’s Generic Strategies
Low Cost
Competitive
Advantage
WalMart
Domino’s
Grocery Outlet
Little Caesar’s
Uniqueness
Broad
Narrow
Competitive Scope
Porter’s Generic Strategies
Low Cost
Competitive
Advantage
Uniqueness
WalMart
Dominos’s
Big Lots
Lil Caesar’s
Target
Papa John’s
Broad
Narrow
Competitive Scope
Porter’s Generic Strategies
Low Cost
Competitive
Advantage
Uniqueness
WalMart
Domino’s
Big Lots
Little Caesar’s
Target
Papa John’s
Nordstrom
Papa Murphy’s
Broad
Narrow
Competitive Scope
Differentiation
 Offer attributes that customers want, and
are willing to pay for. Leads to premium
price, higher volume, loyalty
 Maintaining uniqueness can be a challenge
 Kodak, Wrigley’s, Campbell’s, Coca-Cola, Gillette,
Del Monte, and Nabisco all leaders since 1923
 Marginal revenue must exceed the costs of
differentiation
PERCEIVED VALUE
versus
INCREMENTAL COSTS
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%
Differentiation (cont.)
 Signalling important when:
 nature of differentiation difficult to quantify
 first-time purchase –
 re-purchase infrequent
 buyers unsophisticated
To introduce his beer,
Coors often gave free
sample to gold
miners.

..because you can’t sell beer to
minors.
Differentiation (cont.)
 Risky when:








quick imitation
no value in uniqueness
over differentiation
 cell phones
premium price
costs too high
poorly understood/changing customer needs
 Minivan, FAO Schwartz
costs/price become more important than
uniqueness
unwillingness to offer true differentiation
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…..
Problems with P&G’s Differentiation Strategy
How has P&G responded?
Introduction of new, higher margined
products like battery powered
toothbrush and white strips
Introduction of “Rejuvenating Effects,” a
toothpaste for women marketed as a
beauty product
Using Emeril Lagasse to hawk their
citrus, cinnamon, and herbal mint
toothpastes
How can Differentiation protect against…?
New Entrants
Starbuck’s
$1.80
Profit
Costs
Price
How can Differentiation protect against…?
New Entrants
Joe’s Coffee
Starbuck’s
$1.80
Assume
Equal
Costs
How can Differentiation protect against…?
New Entrants
Joe’s Coffee
99 cents
Starbuck’s
$1.80
How can Differentiation protect against…?
New Entrants
Joe’s Coffee
99 cents
Starbuck’s
$1.80
Extra Profits
How can Differentiation protect against…?
Rivals
Joe’s Coffee
99 cents
Starbuck’s
$1.80
How can Differentiation protect against…?
Joe’s Coffee
99 cents
Starbuck’s
$1.80
Advertising
& Promotions
drive costs UP
How can Differentiation protect against…?
Joe’s Coffee
99 89 cents
Starbuck’s
$1.80 $1.70
Discounts
and sales drive
prices DOWN
How can Differentiation protect against…?
Substitutes
Starbuck’s
$1.80
How can Differentiation protect against…?
Starbuck’s
$1.80
There is no
substitute for the
truly differentiated
product
How can Differentiation protect against…?
Power of Buyers - How do powerful buyer’s
leverage their power?
Lower Prices, Higher Quality
How can Differentiation protect against…?
Joe’s Coffee Lower
99 89 cents Prices
Raise
Quality
Starbuck’s
$1.80 $1.70
How can Differentiation protect against…?
Power of Suppliers - How do powerful
suppliers leverage their power?
Drive up costs
How can Differentiation protect against…?
Starbuck’s
$1.70
Joe’s Coffee
89 cents
Raise
Costs
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.
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?
Low Cost Leadership
Design, produce, and market a comparable product at a
lower cost
Effective utilization of value-chain
 capital intensive mfg processes - efficient scale
 process, not product engineering - cost reductions
 products designed for simple assembly and
sharing common components
 procurement and materials handling
 low cost distribution
Requires organizational culture to support
 close supervision, cost controls
900
800
700
600
500
Sonic - 1100 units
Church's - 1400 units
400
300
200
100
0
Personnel
SGA
Low Cost Leadership (cont.)
Attractive when price is dominant consideration
 commodity
 low switching costs
 powerful buyers
Low Cost Leadership (cont.)
What firms pursue a low cost
strategy?
How do they drive their costs
down
Risky when:




technology breakthroughs frequent
easy to imitate
costs advantages erode more
quickly than differentiation
causes near-sightedness on a few
activities/sunk costs
How can Low Costs provide protection from….
New Entrants
Rubbermaid
Tub
$1.99
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.99
Higher
costs
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rivalry
Rubbermaid
Tub
$1.99
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.89
…can push
prices down….
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.99
… or push
costs up
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Substitutes
Rubbermaid
Tub
$1.99
Wal-Mart
Joes
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.89
…can push
prices down….
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.99
… or push
costs up
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Power of Buyers
Rubbermaid
Tub
$1.99
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.89
…can push
prices down….
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Power of Suppliers
Rubbermaid
Tub
$1.99
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.99
… can push
costs up
Wal-Mart
Joe’s
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.
Focus
 Emphasizing a market niche where
customers have unique preferences or
requirements. Either focus-low cost or
focus-differentiation
 Profitable when
 niche is large, growing
 niche is not crucial to broad-based
competitors
 firm is able to defend position
Focus (cont.)
 What firms pursue a focus strategy?
 What is their niche?
 Risky when:




competitor “outfocuses the focuser”
broad based competitors have deep pockets
homogenization of customer needs
economies of scope becomes a dominant KSF
Focus (cont.)

Market Segmentation – clustering of
people with similar needs into
identifiable groups

E.g. consumer vs. industrial,
demographic, sociocultural, geographic,
psychological (lifestyle), consumption
patterns (frequency of use)
Integrated Low Cost-Differentiation
 Combines both generic strategies
 Difficult to implement
Stuck in the Middle
 Firm’s offering are too costly to
compete with low costs provider’s
product, and too undifferentiated to
command the price premium gained
by the differentiated firm
BSG Application Exercise

Get into your BSG teams and
answer the following questions


1) What were the 4 most critical
market dimensions you wanted to
compete on? What 4 areas did you
intend on gaining an advantage?
2) Based upon the results thus far, how
well are you performing on those 4
dimensions?