Business-Level Strategy:: How Do We Compete?

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

Cost
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Uniqueness
Cost
Leadership Differentiation

Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Cost
Uniqueness
Cost
Leadership
Differentiation
Focused Low
Cost
Focused
Differentiation

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
The Experience
Experience Curve
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
Examples of
of Experience
Experience Curves
Curves
75%
100K 200K
500K
1,000K
Accumulated unit production
(millions)
UK refrigerators, 1957-71
Price Index
50 100 200 300
1960 Yen
15K
20K 30K
Japanese clocks & watches, 1962-72
70% slope
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
- Advertising & Sales
- Logistics & Operations
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training, motivation
Value Chain of Firm Activities

Firm Infrastructure
Human Resource Management
Technological Development
M
A
R
G
IN
M Service
A
R
G
IN
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
Firms Production
Processes
Located in Close
Proximity with
Suppliers
Primary Activities

Operations
Cost Leadership Business
Level Strategy
Effective Training Programs
to Improve Worker
Efficiency and Effectiveness

Timing of Asset
Purchases
Investments in Technology in order

to Reduce Costs Associated with
Manufacturing Processes
M
A
RG
Policy Choice of
Frequent Evaluation
to
PlantProcesses
Technology
Procurement
IN
Monitor Suppliers Performances
Organizational
Learning
Primary Activities
R
G
IN
Products Priced to
Generate Sales
Volume
M
A
Policy Choice of Efficient Order

Plant Technology Sizes
Organizational
Small, Highly
Trained Sales
Learning
Force
Service
Outbound
Logistics
Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Inbound
Logistics
Support
Activities
Firm
Efficient Plant
Scale to Minimize
Infrastructure
Mfg. Costs
Relatively Few
Management Layers to
Reduce Overhead

Cost Leadership Business LevelOutbound
Strategy
Logistics
Delivery Schedule
that Reduces Costs
M
Human Resource ManagementSelection of Low
A
R
Cost Transport G
Carriers
IN
Efficient Order
Frequent Evaluation Processes to
Procurement
Monitor Suppliers Performances
Sizes
and Severity
Products Priced to of Recalls
Generate Sales
Volume
Efficient Order
Sizes
National Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
M
A
Selection of Low
Cost Transport
Carriers
R
G
IN
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

Marketing
Cost Leadership Business Level Strategy
& Sales
Primary Activities
Small, Highly
Trained Sales Force
Products Priced
A
to GenerateRSales
G
Volume
IN
M
A
R
G
IN
National Scale
Advertising
Marketing
& Sales
Marketing
& Sales
Service
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
Human Resource
Effective Product
Installations to M
Management
Reduce
A
RG
Recalls
IN
Primary Activities
R
G
IN
M
A
Marketing
Service
& Sales
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Support
Activities

Service
Firm Infrastructure

Support
Activities
Firm Infrastructure
M
A
RG
IN
Primary Activities
Frequent Evaluation
Processes to Monitor
Suppliers Performances
M
A
Systems and Procedures to Find

the Lowest Cost Products to
Purchase Raw Materials
R
G
IN
Procurement
Marketing
& Sales
Service
Outbound
Logistics
Inbound
Logistics
Operations
Procurement
Procurement

Support
Activities
Firm Infrastructure
M
A
RG

IN
Marketing
& Sales
Outbound
Logistics
Primary Activities
R
G
IN
Investments in Technology in
order to Reduce Costs Associated
with Manufacturing Processes
M
A
Easy-to-Use
Manufacturing
Technologies
Operations
Inbound
Logistics
Service
Procurement

Support
Activities
Firm Infrastructure
M
A
RG

IN
Primary Activities
M
A
Service
Marketing
& Sales
Effective Training Programs

to Improve Worker
Efficiency and Effectiveness
Outbound
Logistics
Operations
Inbound
Logistics
Consistent Policies to
Reduce Turnover Costs
R
G
IN
Human Procurement
Resource Management

M
A
RG

Technological
Development
Firm Infrastructure
Primary Activities
IN
R
G
IN
M
A
Service
Relatively Few
Management Layers
to Reduce Overhead
Marketing
& Sales
Simplified Planning
Procurement
Practices to Reduce
Planning Costs
Outbound
Logistics
Inbound
Logistics
Cost Effective
MIS Systems
Operations
Support
Activities
Firm Infrastructure
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

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

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

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

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 of
supplier power
Substitute
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

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

M
A
RG

IN
Primary Activities
R
G
IN
M
A
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure

DifferentiationInbound
Business Level Strategy
Logistics
Primary Activities
IN
M
A
R
G
IN
M
A
RG
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

Operations
Differentiation Business
Level Strategy

Technological
Rapid responses to
customers unique
Development
manufacturing
specifications
M
A
RG
IN
Primary Activities
R
G
IN
M
A
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Operations
Support
Activities
Firm
Consistent
manufacturing of
Infrastructure
attractive products

Differentiation Business Level Outbound
Strategy
Logistics
Accurate and
responsive order
Managementprocessing MA
procedures
R
Primary Activities
Rapid and timely

product deliveries
to customers
IN
R
G
IN
Outbound
Outbound
Logistics
Logistics
Procurement
M
A
Marketing
& Sales
Service
Human Resource
Inbound
Logistics
Operations
Support
Activities
Firm Infrastructure

Marketing
& Sales
Primary Activities
Extensive personal
relationships with
buyers
Premium
Pricing
R
G
IN
Outbound
Logistics
Procurement
IN
Marketing
& Sales
Marketing
& Sales
Service
Strong Coordination
among functions in
R&D, Marketing
M
A
and Product
R
Development G
M
A
Inbound
Logistics
Operations
Support
Activities
Firm Infrastructure
Human Resource
Complete field
stocking of
Management
replacement
parts
M
A
RG
IN
Primary Activities
R
G
IN
M
A
Marketing
Service
& Sales
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Support
Activities

Service
Firm Infrastructure

Support
Activities
Firm Infrastructure
M
A
RG

IN
Purchase of highest
quality replacement
parts
Primary Activities
R
G
IN
Systems and procedures

used to find the highest
quality raw materials
Located in
Close Proximity
with Suppliers
M
A
Procurement
Marketing
& Sales
Service
Outbound
Logistics
Inbound
Logistics
Operations
Procurement
Procurement

Support
Activities
Firm Infrastructure
M
A
RG

IN
Procurement
Marketing
& Sales
Service
Primary Activities
Strong
capability in
basic research
R
G
IN
Investments in technologies to produce highly

differentiated products
M
A
Coordination among
R&D, marketing and
product development
Outbound
Logistics
Inbound
Logistics
Operations

Support
Activities
Firm Infrastructure
M
A
RG
IN
Human Procurement
Resource Management
Primary Activities
R
G
IN
Superior
personnel
training
M
A
Marketing
& Sales
Service
Extensive use of
subjective performance
measures
Outbound
Logistics
Inbound
Logistics
Operations
Compensation programs
which encourage worker
creativity and productivity

Technological
Development
Firm Infrastructure
Primary Activities
M
A
RG
IN
R
G
IN
A companywide emphasis
on producing high quality
products
M
A
Outbound
Logistics
Inbound
Logistics
Operations
Highly developed Information

Systems to better Procurement
understand
customers purchasing preferences
Marketing
& Sales
Service
Support
Activities
Firm Infrastructure

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

Threat of
New
Entrants
Can fend off New Entrants

because:
* New products must
surpass proven products
* Or be equal to performance
at lower prices

Threat of
New
Entrants
Can mitigate Buyer Power because:

Well differentiated products reduce
customer sensitivity to price increases
Bargaining
Power of
Buyers

Threat of
Substitute
Products
Threat of
New
Entrants

Substitutes because:
* Brand loyalty tends to
reduce new product trial
and brand switching
Bargaining
Power of
Suppliers

Bargaining
Power of
Suppliers
Threat of
New
Entrants
Can mitigate Supplier Power by:

* Absorbing price increases due to
higher margins

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

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

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
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
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

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
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
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

Business-Level Strategy:: How Do We Compete?

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Business-Level Strategy:: How Do We Compete?

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Business-Level Strategy:

Generic Business Level Strategies

Generic Business Level Strategies

Generic Business Level Strategies

Generic Business Level Strategies

The Law of Experience

The unit cost value added to a standard

Japanese clocks & watches, 1962-72

Choices that Drive Costs

Capacity utilization pattern

Mix & variety of products

Value Chain of Firm Activities

Value Creating Activities common to a

Value Creating Activities common to a

Human Resource Management

Investments in Technology in order

Monitor Suppliers Performances

Policy Choice of Efficient Order

Value Creating Activities common to a

Delivery Schedule Small, Highly

Value Creating Activities common to a

Value Creating Activities common to a

Value Creating Activities common to a

Systems and Procedures to Find

Value Creating Activities common to a

Human Resource Management

Value Creating Activities common to a

Human Resource Management

Effective Training Programs

Value Creating Activities common to a

Human Resource Management

Effective Cost Leaders can remain profitable

Effective Cost Leaders can remain profitable

Can frighten off New Entrants

Effective Cost Leaders can remain profitable

Can mitigate Buyer Power by:

Effective Cost Leaders can remain profitable

Well positioned relative to

* Buy patents developed by

* Lower prices to maintain

Effective Cost Leaders can remain profitable

Can mitigate Supplier Power by:

Effective Cost Leaders can remain

Focus on efficiency could cause

Generic Business Level Strategies

Differentiation Business Level Strategy

Unique product features

Value Creating Activities common to a

Human Resource Management

Value Creating Activities common to a

Value Creating Activities common to a

Human Resource Management

Value Creating Activities common to a

Rapid and timely

Value Creating Activities common to a

Human Resource Management

Value Creating Activities common to a

Value Creating Activities common to a

Human Resource Management

Systems and procedures

Value Creating Activities common to a

Human Resource Management

Investments in technologies to produce highly