Business-Level Strategy:
How do we compete?
Generic Business Level Strategies
Source of Competitive Advantage
Cost
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Cost
Leadership
Uniqueness
Generic Business Level Strategies
Source of Competitive Advantage
Cost
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Uniqueness
Cost
Leadership Differentiation
Generic Business Level Strategies
Source of Competitive Advantage
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Cost
Uniqueness
Cost
Leadership
Differentiation
Focused Low
Cost
Focused
Differentiation
Generic Business Level Strategies
Source of Competitive Advantage
Cost
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Uniqueness
Cost
DifferenLeadership
tiation
Integrated
Low Cost/
Differentiation
Focused
Focused
DifferenLow Cost
tiation
Profit = (P – C) × Q
The Experience Curve
The “Law of Experience”
1994
1995
Cost per
unit of
output
The unit cost value added to a standard
product declines by a constant %
(typically 20-30%) each time cumulative
output doubles.
1996
1997
1998
Cumulative Output
1999
2000
Examples of Experience Curves
75%
UK refrigerators, 1957-71
Price Index
50 100 200 300
1960 Yen
15K
20K 30K
Japanese clocks & watches, 1962-72
70% slope
100K 200K
500K
1,000K
Accumulated unit production
(millions)
5
10
50
Accumulated units
(millions)
Choices that Drive Costs
Economies of scale
Product features
Asset utilization
Performance
Capacity utilization pattern
Mix & variety of products
- Seasonal, cyclical
Interrelationships
- Order processing
and distribution
Value chain linkages
Service levels
Small vs. large buyers
Process technology
Wage levels
- Advertising & Sales
Product features
- Logistics & Operations
Hiring, training, motivation
Value Chain of Firm Activities
Firm Infrastructure
Human Resource Management
Technological Development
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Value Creating Activities common to a
Inbound
Cost Leadership Business Level Strategy
Logistics
Inbound
Logistics
Support
Activities
Highly Efficient
Systems to Link
Suppliers’
Products with the
Firm’s Production
Processes
Located in Close
Proximity with
Suppliers
Primary Activities
Value Creating Activities common to a
Operations
Cost Leadership Business
Level Strategy
Effective Training Programs
to Improve Worker
Efficiency and Effectiveness
Human Resource Management
Timing of Asset
Purchases
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes
Technological Development
Policy Choice of
Frequent Evaluation
to
PlantProcesses
Technology
Procurement
Outbound
Logistics
Operations
Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Policy Choice of Efficient Order
Plant Technology Sizes
Organizational
Learning
Primary Activities
Organizational
Small, Highly
Trained Sales
Learning
Force
Products Priced to
Generate Sales
Volume
Service
Monitor Suppliers’ Performances
Inbound
Logistics
Support
Activities
Firm
Efficient Plant
Scale to Minimize
Infrastructure
Mfg. Costs
Relatively Few
Management Layers to
Reduce Overhead
Value Creating Activities common to a
Cost Leadership Business LevelOutbound
Strategy
Logistics
Delivery Schedule
that Reduces Costs
Human Resource ManagementSelection of Low
Technological Development
Cost Transport
Carriers
Efficient Order
Frequent Evaluation Processes to
Procurement
Monitor Suppliers’ Performances
Sizes
Effective Product
Interrelationships
Installations to
Reduce
Frequency
with
Sister
Units
Marketing
& Sales
Service
Delivery Schedule Small, Highly
that Reduces
Trained Sales
Costs
Force
Outbound
Outbound
Logistics
Logistics
Support
Activities
Firm Infrastructure
Selection of Low
Cost Transport
Carriers
and Severity
Products Priced to of Recalls
Generate Sales
Volume
Efficient Order
Sizes
National Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
Value Creating Activities common to a
Marketing
Cost Leadership Business Level Strategy
& Sales
Human Resource Management
Technological Development
Primary Activities
Small, Highly
Trained Sales Force
Products Priced
to Generate Sales
Volume
National Scale
Advertising
Marketing
& Sales
Marketing
& Sales
Service
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
Human Resource
Effective Product
Installations to
Management
Reduce
Recalls
Technological Development
Primary Activities
Marketing
Service
& Sales
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Support
Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Service
Firm Infrastructure
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological Development
Procurement
Systems and Procedures to Find
the Lowest Cost Products to
Purchase Raw Materials
Primary Activities
Marketing
& Sales
Service
Outbound
Logistics
Inbound
Logistics
Operations
Procurement
Procurement
Frequent Evaluation
Processes to Monitor
Suppliers’ Performances
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Human Resource Management
Technological Development
Marketing
& Sales
Outbound
Logistics
Easy-to-Use
Manufacturing
Technologies
Operations
Technological Development
Service
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
Investments in Technology in
order to Reduce Costs Associated
with Manufacturing Processes
Primary Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological Development
Human Procurement
Resource Management
Primary Activities
Service
Marketing
& Sales
Effective Training Programs
to Improve Worker
Efficiency and Effectiveness
Outbound
Logistics
Operations
Inbound
Logistics
Consistent Policies to
Reduce Turnover Costs
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological
Development
Firm Infrastructure
Primary Activities
Service
Relatively Few
Management Layers
to Reduce Overhead
Marketing
& Sales
Outbound
Logistics
Simplified Planning
Procurement
Practices to Reduce
Planning Costs
Operations
Inbound
Logistics
Cost Effective
MIS Systems
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
Bargaining
Power of
Buyers
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can frighten off New Entrants
due to the need to:
* Enter at large scale to
be Cost Competitive
* Take time to move down
the “Learning Curve”
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can mitigate Buyer Power by:
* Driving prices far below competitors
may cause exit and shift power back
to firm
Bargaining
Power of
Buyers
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
Substitute
Products
Threat of
New
Entrants
Well positioned relative to
Substitutes in order to:
* Make investments to create
substitutes first
* Buy patents developed by
potential substitutes
* Lower prices to maintain
value position
Bargaining
Power of
Buyers
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Can mitigate Supplier Power by:
* Low cost position makes them better
able to absorb cost increases
large purchases
* More likely to make very
Threat of
which reduces chance Substitute
of supplier power
Products
Bargaining
Power of
Buyers
Effective Cost Leaders can remain
profitableavoid
Competitors
even when the Five Forces appear
unattractive
price
wars with Cost
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
Leaders, which
creates higher profits
for entire industry
Bargaining
Power of
Buyers
The Major
Risks involved
with a
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
Generic Business Level Strategies
Source of Competitive Advantage
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Cost
Uniqueness
Cost
Leadership
Differentiation
Differentiation Business Level Strategy
Key Criteria
Value provided by unique
features and value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation
Drivers of Differentiation
Some Examples:
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
Value Creating Activities common to a
Differentiation Business Level Strategy
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
Value Creating Activities common to a
Inbound
Differentiation Business Level Strategy
Logistics
Primary Activities
Service
Outbound
Logistics
of incoming raw
Human Resource
Management
materials
to
minimize damage
and Development
improve the
Technological
quality of the final
product
Procurement
Inbound
Logistics
Inbound
Logistics
Operations
Support
Activities
Firm Infrastructure
Superior handling
Value Creating Activities common to a
Operations
Differentiation Business
Level Strategy
Human Resource Management
Technological
Rapid responses to
customers unique
Development
manufacturing
specifications
Primary Activities
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Operations
Support
Activities
Firm
Consistent
manufacturing of
Infrastructure
attractive products
Value Creating Activities common to a
Differentiation Business Level Outbound
Strategy
Logistics
Human Resource
Accurate and
responsive order
Managementprocessing
procedures
Technological Development
Primary Activities
Rapid and timely
product deliveries
to customers
Marketing
& Sales
Service
Outbound
Outbound
Logistics
Logistics
Procurement
Inbound
Logistics
Operations
Support
Activities
Firm Infrastructure
Value Creating Activities common to a
Marketing
Differentiation Business Level Strategy
& Sales
Human Resource Management
Outbound
Logistics
Procurement
Primary Activities
Strong Coordination
among functions in
R&D, Marketing
and Product
Development
Extensive personal
relationships with
buyers
Marketing
& Sales
Marketing
& Sales
Service
Technological Development
Inbound
Logistics
Operations
Support
Activities
Firm Infrastructure
Premium
Pricing
Human Resource
Complete field
stocking of
Management
replacement
parts
Technological Development
Primary Activities
Marketing
Service
& Sales
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Support
Activities
Value Creating Activities common to a
Differentiation Business Level Strategy
Service
Firm Infrastructure
Value Creating Activities common to a
Differentiation Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological Development
Procurement
Systems and procedures
used to find the highest
quality raw materials
Purchase of highest
quality replacement
parts
Primary Activities
Marketing
& Sales
Service
Outbound
Logistics
Inbound
Logistics
Operations
Procurement
Procurement
Located in
Close Proximity
with Suppliers
Value Creating Activities common to a
Differentiation Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological Development
Marketing
& Sales
Service
Procurement
Coordination among
R&D, marketing and
product development
Outbound
Logistics
Inbound
Logistics
Operations
Technological Development
Investments in technologies to produce highly
differentiated products
Primary Activities
Strong
capability in
basic research
Value Creating Activities common to a
Differentiation Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological Development
Human Procurement
Resource Management
Primary Activities
Marketing
& Sales
Service
Extensive use of
subjective performance
measures
Outbound
Logistics
Inbound
Logistics
Operations
Compensation programs
which encourage worker
creativity and productivity
Superior
personnel
training
Value Creating Activities common to a
Differentiation Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological
Development
Firm Infrastructure
Primary Activities
A companywide emphasis
on producing high quality
products
Marketing
& Sales
Service
Outbound
Logistics
Inbound
Logistics
Operations
Highly developed Information
Systems to better Procurement
understand
customers’ purchasing preferences
Differentiation Business Level Strategy
Effectiveness with Differentiation grows out of
Value Chain activities
Examples:
Heineken beer
Raw materials – brand name
Steinway pianos
Raw materials & Workmanship
Mercedes Benz autos
Technology and Workmanship
Intel microprocessors
Technological superiority
Caterpillar tractors
Service buyers’ needs quickly
anywhere in the world
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can fend off New Entrants
because:
* New products must
surpass proven products
* Or be equal to performance
at lower prices
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can mitigate Buyer Power because:
Well differentiated products reduce
customer sensitivity to price increases
Bargaining
Power of
Buyers
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
Substitute
Products
Threat of
New
Entrants
Well positioned relative to
Substitutes because:
* Brand loyalty tends to
reduce new product trial
and brand switching
Bargaining
Power of
Suppliers
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Can mitigate Supplier Power by:
* Absorbing price increases due to
higher margins
Well positioned relative to
Substitutes because:
prices
* Passing on higher supplier
Threat of
Brand
loyalty
tends
to
*
because
buyers
are
brand
loyal
Substitute
reduce new product trial
and brand switching
Products
Bargaining
Power of
Suppliers
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Bargaining
Power of
Buyers
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
Can fend off New Entrants because:
Brand
loyalty
New
products
must
*
surpass proven products
overcomes
much
* Or be equal to performance
price
competition
at lower prices
Bargaining
Power of
Suppliers
The Major
Risks involved
with a
Differentiation
Business Level
Strategy
Customers may decide that
the cost of “uniqueness” is
too great
Competitors may learn
how to imitate Value Chain
The means of uniqueness
may no longer be valued
by customers
Generic Business Level Strategies
Source of Competitive Advantage
Breadth of
Competitive
Scope
Cost
Uniqueness
Broad
Target
Market
Cost
Leadership
Differentiation
Narrow
Target
Market
Focused
Low Cost
Focused
Differentiation
Focused Business Level Strategies
Focused
Business Level
Strategies
involve the
same basic
approach as
Broad Market
Strategies
*
However.....
Opportunities may exist because:
*
Large firms may
overlook small niches
*
Firm may lack resources
to compete industry wide
May be able to serve a narrow market segment more
effectively than industry-wide competitors
Focused Business Level Strategies
Focused
Business Level
Strategies
involve the
same basic
approach as
Broad Market
Strategies
- Bang & Olufsen
- Snap-On tools
- IAMS
*
May be able to retrofit old
factories to keep costs down
*
Minimize R&D costs by
copying innovators
Upscale electronic components
High quality mechanics’ tools
Premium pet foods
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
Custom manufacturers of parts for
Harley-Davidson
motorcycles
Firm may be “outfocused”
by competitors
The Major
Risks involved
with a Focused
Differentiation
Business Level
Strategy
Large competitor may
set its sights on your
niche market
Preferences of niche market
may change to match those of
broad market
Generic Business Level Strategies
Source of Competitive Advantage
Cost
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Uniqueness
Cost
DifferenLeadership
tiation
Integrated
Low Cost/
Differentiation
Focused
Focused
DifferenLow Cost
tiation
Integrated Low Cost/Differentiation Strategy
Recognize that the Integrated Low Cost/
Differentiation business level strategy involves a
Compromise
The risk is that the firm may become “Stuck in
the Middle” lacking a strong commitment to or
expertise with either type of generic strategy
Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Low
Cost
Use
a single aircraft model
(Boeing 737)
Use secondary airports
Fly short
routes
No meals
15 minute turnaround time
No reserved seats
No travel agent reservations
Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Low Cost
Use a single aircraft model
(Boeing 737)
Use secondary airports
Fly short routes
No meals
15 minute turnaround time
No reserved seats
No travel agent reservations
Differentiation
Focus on customer
satisfaction
High level of employee
dedication
New flight services for
business travelers
(Phones and faxes)
What is the Strategy?
Friendly Robotics