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Chapter 4
Business-Level Strategy
Michael A. HittR. Duane IrelandRobert E. Hoskisson
2000 South-Western College Publishing
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Chapter 3
Internal
Environment
Chapter 2
External
EnvironmentThe StrategicManagement
Process
Strategic Intent
Strategic Mission
Strategic
Competitiveness
Above Average
ReturnsFeedback
Strategy Formulation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 7
Acquisitions &
Restructuring
Strategy Implementation
Chapter 10
Corporate
Governance
Chapter 11
Structure
& Control
Chapter 12
Strategic
Leadership
Chapter 13
Entrepreneurship& Innovation
S t r a
t e g i c
I n p u
t s
S t r a
t e g i c
A c t
i o n s
S t r a
t e g i c
O u t c o m e s
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Chapter 4
Business LevelStrategy
SustainableCompetitiveAdvantage
Chapter 2
External Environment
Chapter 3
Internal Environment
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CoreCompetency
The resources and capabilities that have been determined to
be a source of competitiveadvantage for a firm over itsrivals.
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Strategy
An integrated and coordinatedset of actions taken to exploitcore competencies and gain acompetitive advantage.
CoreCompetency
The resources and capabilities that have beendetermined to be a source of competitiveadvantage for a firm over its rivals.
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StrategyAn integrated and coordinated set of actions taken to exploit core competencies
and gain a competitive advantage.
BusinessLevelStrategy
Actions taken to provide value tocustomers and gain a competitiveadvantage by exploiting corecompetencies in specific,
individual product markets.
CoreCompetency
The resources and capabilities that have beendetermined to be a source of competitiveadvantage for a firm over its rivals.
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Basis for Customer SegmentationConsumer Markets 1. Demographic factors (age, income, sex, etc.)2. Socioeconomic factors
(social class, stage in the family life cycle)
3. Geographic factors(culture, region or country differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns
(heavy, moderate, and light users)6. Perceptual factors
(benefit segmentation, perceptual mapping)
7. Brand loyalty patterns
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Basis for Customer Segmentation Industrial Markets 1. End use segments
2. Product segments (based on technologicaldifferences or production economics)
3. Geographic segments (defined by boundaries between countries or by regional differences withinthem)
4. Common buying factor segments (cut across product/market and geographic segments)
5. Customer size segments
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Generic Business Level Strategies
Cost Uniqueness
Source of Competitive Advantage
Breadth of Competitive
Scope
BroadTargetMarket
NarrowTargetMarket
FocusedDifferen-
tiation
CostLeadership
Differen-tiation
FocusedLow Cost
CostLeadership
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Key Criteria:
Cost Leadership Business Level Strategy
Relatively standardized products
Features acceptable to many customers
Lowest competitive price
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Requirements:Constant effort to reduce costs through:
Building efficient scale facilities
State of the art manufacturing facilities
Simplification of processes
Minimizing costs of sales, R&D and service
Monitoring costs of activities provided by outsiders
Tight control of production costs and overhead
Cost Leadership Business Level Strategy
7/29/2019 61244039 Business Level Strategy
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S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Value Creating Activities Common to aCost Leadership Business Level Strategy
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S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with the
Firms ProductionProcesses Timing of AssetPurchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severity
of Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
Value Creating Activities Common to aCost Leadership Business Level Strategy
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Value Creating Activities Common to aCost Leadership Business Level Strategy
Primary Activities
S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with the
Firms ProductionProcesses Timing of AssetPurchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severity
of Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
I n b o u n d
L o g
i s t i c s
InboundLogisticsHighly EfficientSystems to Link SuppliersProducts with theFirms Production
ProcessesLocated in CloseProximity withSuppliers
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Value Creating Activities Common to aCost Leadership Business Level Strategy
Primary Activities
S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with the
Firms ProductionProcesses Timing of AssetPurchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severity
of Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
O p e r a t
i o n s
OperationsEfficient Plant
Scale to MinimizeMfg. Costs
Timing of AssetPurchases
Policy Choice of Plant Technology
OrganizationalLearning
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Value Creating Activities Common to aCost Leadership Business Level Strategy
Primary Activities
S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with the
Firms ProductionProcesses Timing of AssetPurchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severity
of Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
O u t
b o u n
d
L o g
i s t i c s
OutboundLogistics
Selection of LowCost TransportCarriers
Delivery Schedulethat Reduces Costs
Efficient OrderSizesInterrelationshipswith Sister Units
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Value Creating Activities Common to aCost Leadership Business Level Strategy
Primary Activities
S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with the
Firms ProductionProcesses Timing of AssetPurchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severity
of Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
M a r
k e t i n g
& S a l e s
National ScaleAdvertising
Products Pricedto Generate SalesVolume
Small, HighlyTrained Sales Force
Marketing& Sales
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S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with the
Firms ProductionProcesses Timing of AssetPurchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severity
of Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
S e r v
i c e
ServiceEffective ProductInstallations toReduceRecalls
Value Creating Activities Common to aCost Leadership Business Level Strategy
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S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with theFirms ProductionProcesses Timing of Asset
Purchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severityof Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
Procurement
Systems and Procedures to Findthe Lowest Cost Products toPurchase Raw Materials
Frequent EvaluationProcesses to MonitorSuppliers Performances
Procurement
Value Creating Activities Common to aCost Leadership Business Level Strategy
7/29/2019 61244039 Business Level Strategy
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S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with theFirms ProductionProcesses Timing of Asset
Purchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severityof Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
Technological Development
Technological DevelopmentEasy-to-UseManufacturingTechnologies
Investments in Technology inorder to Reduce Costs Associatedwith Manufacturing Processes
Value Creating Activities Common to aCost Leadership Business Level Strategy
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Primary Activities
S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with theFirms ProductionProcesses Timing of Asset
Purchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severityof Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
Human Resource Management
Human Resource ManagementConsistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Value Creating Activities Common to aCost Leadership Business Level Strategy
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Primary Activities
S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n
d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Cost EffectiveMIS Systems
Relatively Few
Management Layers toReduce Overhead
Simplified Planning
Practices to ReducePlanning Costs
Consistent Policies toReduce Turnover Costs
Effective Training Programsto Improve WorkerEfficiency and Effectiveness
Highly EfficientSystems to Link SuppliersProducts with theFirms ProductionProcesses Timing of Asset
Purchases
Efficient PlantScale to MinimizeManufacturingCosts
Selection of LowCost TransportCarriers
Delivery Schedulethat ReducesCosts
National ScaleAdvertising
Products Priced toGenerate SalesVolume
Small, HighlyTrained SalesForce
Effective ProductInstallations toReduce Frequencyand Severityof Recalls
Easy-to-Use ManufacturingTechnologies
Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes
Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials
Frequent Evaluation Processes toMonitor Suppliers Performances
Located in CloseProximity withSuppliers
Policy Choice of Plant Technology
OrganizationalLearning
Efficient OrderSizes
Interrelationshipswith Sister Units
Firm Infrastructure
Firm InfrastructureCost EffectiveMIS Systems
Relatively FewManagement Layersto Reduce Overhead
Simplified PlanningPractices to ReducePlanning Costs
Value Creating Activities Common to aCost Leadership Business Level Strategy
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How to Obtain a Cost Advantage
1. Determine and Control Cost Drivers
2. Reconfigure the Value Chain as needed
Alter production processChange in automation
New distribution channel
Direct sales in place of indirect sales
New advertising media
New raw material
Backward integrationForward integration
Change location relativeto suppliers or buyers
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Choices That Drive Costs
Economies of scaleAsset utilization
Capacity utilization pattern
Value chain linkages
Interrelationships
- Advertising & Sales- Logistics & Operations
- Seasonal, cyclical
- Order processingand distribution
Product features
Product featuresPerformance
Mix & variety of products
Service levelsSmall vs. large buyers
Process technology
Wage levels
Hiring, training, motivation
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Three Key Questions
2. How can a group of linked valueactivities be regrouped or reordered?
3. How might coalitions with other firms lower or eliminate costs?
Gallo sold wine through grocery stores rather than liquor
stores because they were more efficient distributors
1.How can an activity be performeddifferently or even eliminated?
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Effective Cost Leaders can remain profitable even when the
Five Forces appear unattractive
Eff i C L d i fi bl h
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Can frighten off New Entrantsdue to the need to:
Enter at large scale tobe Cost Competitive
*
Take time to move down
the Learning Curve
*
Effective Cost Leaders can remain profitable even whenthe Five Forces appear unattractive
Threat of New
Entrants
Eff i C L d i fi bl h
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Can frighten off New Entrants dueto the need to:
Enter at Large Scale to beCost Competitive
*
Take time to move down theLearning Curve
*
BargainingPower of
Buyers
Threat of New
Entrants
Can mitigate Buyer Power by:
* Driving prices far below competitorsmay cause exit and shift power back to firm
Effective Cost Leaders can remain profitable even whenthe Five Forces appear unattractive
Eff ti C t L d i fit bl h
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Can frighten off New Entrants dueto the need to:
Enter at Large Scale to beCost Competitive
*
Take time to move down theLearning Curve
*
Can mitigate Buyer Power by:
Threat of New
Entrants
BargainingPower of Buyers
Driving prices far belowcompetitors which maycause exit and shift powerback to firm
Well positioned relative to Substitutes in order to:
Make investments to create
substitutes first
*
Buy patents developed bypotential substitutes
*
Lower prices to maintain
value position*
Threat of Substitute
Products
Effective Cost Leaders can remain profitable even whenthe Five Forces appear unattractive
Eff ti C t L d i fit bl h
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Can frighten off New Entrants dueto the need to:
Enter at Large Scale to beCost Competitive
*
Take time to move down theLearning Curve
*
Well positioned relative toSubstitutes in order to:
Make investments to create substitutes*
Can buy patents developed bypotential substitutes
*
Lower prices to maintainvalue position
*
BargainingPower of Suppliers
Threat of New
Entrants
Threat of SubstituteProducts
Can mitigate Buyer Power by:
BargainingPower of Buyers
Driving prices far belowcompetitors which maycause exit and shift powerback to firm
Can mitigate Supplier Power by:
Low cost position makes them better
able to absorb cost increases*
More likely to make very large purchaseswhich reduces chance of supplier power
*
Effective Cost Leaders can remain profitable even whenthe Five Forces appear unattractive
Eff ti C t L d i fit bl h
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Effective Cost Leaders can remain profitable even whenthe Five Forces appear unattractive
Threat of New
Entrants
BargainingPower of Suppliers
Threat of SubstituteProducts
Can frighten off New Entrants dueto the need to:
Enter at Large Scale to beCost Competitive
*
Take time to move down theLearning Curve
*
Well positioned relative toSubstitutes in order to:
Make investments to create substitutes*
Can buy patents developed bypotential substitutes
*
Lower prices to maintainvalue position
*
Competitors avoidprice wars with Cost
Leaders, whichcreates higher profitsfor entire industry
Rivalry AmongCompeting Firms
in Industry
Can mitigate Buyer Power by:
BargainingPower of Buyers
Driving prices far belowcompetitors which maycause exit and shift powerback to firm
Can mitigate Supplier Power by:Low cost position makes thembetter able to absorb cost increases
*
More likely to make very largepurchases which reduces chanceof supplier power
*
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Major Risks of Cost LeadershipBusiness Level Strategy
Dramatic technological change could takeaway your cost advantage
Competitors may learn how to imitateValue Chain
Focus on efficiency could cause Cost Leaderto overlook changes in customer preferences
G i B i L l S i
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Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
Uniqueness
Generic Business Level Strategies
G i B i L l S i
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Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
Differen-tiation
Generic Business Level Strategies
Uniqueness
Diff i i
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Key Criteria:
Differentiation Business Level Strategy
Value provided by unique featuresand value characteristics
Command premium price
Superior quality
Rapid innovation
Prestige or exclusivity
High customer service
Diff i i
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Differentiation Business Level StrategyRequirements:
Constant effort to differentiate products through:
Developing new systems and processes
Quality focus
Maximize Human Resource contributionsthrough low turnover and high motivation
Capability in R&D
Shaping perceptions through advertising
Val eCreatingActi ities C
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Primary Activities
S u p p o r
t
A c t
i v i t i e s
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Value Creating Activities Common to aDifferentiation Business Level Strategy
ValueCreatingActivities C t
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Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n
d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
A companywideemphasis on producinghigh quality products
Highly Developed InformationSystems to better understandcustomers purchasing preferences
Compensation programsintended to encourage workercreativity and productivity
Extensive use of subjectiverather than objectiveperformance measures
Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product
Rapid responsesto customersuniquemanufacturingspecifications
Consistentmanufacturing of attractiveproducts
Accurate andresponsive orderprocessingprocedures
Complete fieldstocking of replacement parts
Strongcapability inbasic research
Investments in technologies that willallow the firm to consistently producehighly differentiated products
Systems and procedures used to findthe highest quality raw materials
Purchase of highest qualityreplacement parts
Rapid and timelyproduct deliveriesto customers
Superiorpersonneltraining
Coordination among R&D,product development andmarketing
Extensivepersonalrelationshipswith buyers
Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment
PremiumPricing
Primary Activities
S u p p o r
t
A c t
i v i t i e s
Value Creating Activities Common to aDifferentiation Business Level Strategy
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ValueCreatingActivities C t
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Value Creating Activities Common to aDifferentiation Business Level Strategy
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Primary Activities
S u p p o r
t
A c t
i v i t i e s
A companywideemphasis on producinghigh quality products
Highly Developed InformationSystems to better understandcustomers purchasing preferences
Compensation programsintended to encourage workercreativity and productivity
Extensive use of subjectiverather than objectiveperformance measures
Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product
Rapid responsesto customersuniquemanufacturingspecifications
Consistentmanufacturing of attractiveproducts
Accurate andresponsive orderprocessingprocedures
Complete fieldstocking of replacement parts
Strongcapability inbasic research
Investments in technologies that willallow the firm to consistently producehighly differentiated products
Systems and procedures used to findthe highest quality raw materials
Purchase of highest qualityreplacement parts
Rapid and timelyproduct deliveriesto customers
Superiorpersonneltraining
Coordination among R&D,product development andmarketing
Extensivepersonalrelationshipswith buyers
Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment
PremiumPricing
O p e r a t
i o n s
Operations
Rapid responses tocustomers uniquemanufacturingspecifications
Consistent
manufacturing of attractive products
ValueCreatingActivities C t
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Value Creating Activities Common to aDifferentiation Business Level Strategy
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n
d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Primary Activities
S u p p o r
t
A c t
i v i t i e s
A companywideemphasis on producinghigh quality products
Highly Developed InformationSystems to better understandcustomers purchasing preferences
Compensation programsintended to encourage workercreativity and productivity
Extensive use of subjectiverather than objectiveperformance measures
Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product
Rapid responsesto customersuniquemanufacturingspecifications
Consistentmanufacturing of attractiveproducts
Accurate andresponsive orderprocessingprocedures
Complete fieldstocking of replacement parts
Strongcapability inbasic research
Investments in technologies that willallow the firm to consistently producehighly differentiated products
Systems and procedures used to findthe highest quality raw materials
Purchase of highest qualityreplacement parts
Rapid and timelyproduct deliveriesto customers
Superiorpersonneltraining
Coordination among R&D,product development andmarketing
Extensivepersonalrelationshipswith buyers
Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment
PremiumPricing
O u t
b o u n
d
L o g
i s t i c s
OutboundLogistics
Accurate andresponsive orderprocessingprocedures
Rapid and timelyproduct deliveriesto customers
ValueCreatingActivities Common to a
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Value Creating Activities Common to aDifferentiation Business Level Strategy
Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n
d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Primary Activities
S u p p o r
t
A c t
i v i t i e s
A companywideemphasis on producinghigh quality products
Highly Developed InformationSystems to better understandcustomers purchasing preferences
Compensation programsintended to encourage workercreativity and productivity
Extensive use of subjectiverather than objectiveperformance measures
Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product
Rapid responsesto customersuniquemanufacturingspecifications
Consistentmanufacturing of attractiveproducts
Accurate andresponsive orderprocessingprocedures
Complete fieldstocking of replacement parts
Strongcapability inbasic research
Investments in technologies that willallow the firm to consistently producehighly differentiated products
Systems and procedures used to findthe highest quality raw materials
Purchase of highest qualityreplacement parts
Rapid and timelyproduct deliveriesto customers
Superiorpersonneltraining
Coordination among R&D,product development andmarketing
Extensivepersonalrelationshipswith buyers
Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment
PremiumPricing
M a r
k e t i n g
& S a l e s
Marketing& Sales
Extensive personalrelationships withbuyers
Strong Coordinationamong functions inR&D, Marketingand ProductDevelopment
PremiumPricing
ValueCreatingActivities Common to a
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Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n
d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Primary Activities
S u p p o r
t
A c t
i v i t i e s
A companywideemphasis on producinghigh quality products
Highly Developed InformationSystems to better understandcustomers purchasing preferences
Compensation programsintended to encourage workercreativity and productivity
Extensive use of subjectiverather than objectiveperformance measures
Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product
Rapid responsesto customersuniquemanufacturingspecifications
Consistentmanufacturing of attractiveproducts
Accurate andresponsive orderprocessingprocedures
Complete fieldstocking of replacement parts
Strongcapability inbasic research
Investments in technologies that willallow the firm to consistently producehighly differentiated products
Systems and procedures used to findthe highest quality raw materials
Purchase of highest qualityreplacement parts
Rapid and timelyproduct deliveriesto customers
Superiorpersonneltraining
Coordination among R&D,product development andmarketing
Extensivepersonalrelationshipswith buyers
Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment
PremiumPricing
S e r v
i c e
ServiceComplete fieldstocking of replacementparts
Value Creating Activities Common to aDifferentiation Business Level Strategy
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ValueCreatingActivities Common to a
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Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n
d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Primary Activities
S u p p o r
t
A c t
i v i t i e s
A companywideemphasis on producinghigh quality products
Highly Developed InformationSystems to better understandcustomers purchasing preferences
Compensation programsintended to encourage workercreativity and productivity
Extensive use of subjectiverather than objectiveperformance measures
Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product
Rapid responsesto customersuniquemanufacturingspecifications
Consistentmanufacturing of attractiveproducts
Accurate andresponsive orderprocessingprocedures
Complete fieldstocking of replacement parts
Strongcapability inbasic research
Investments in technologies that willallow the firm to consistently producehighly differentiated products
Systems and procedures used to findthe highest quality raw materials
Purchase of highest qualityreplacement parts
Rapid and timelyproduct deliveriesto customers
Superiorpersonneltraining
Coordination among R&D,product development andmarketing
Extensivepersonalrelationshipswith buyers
Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment
PremiumPricing
Technological Development
Technological DevelopmentStrongcapability inbasic research
Investments in technol-ogies to produce highlydifferentiated products
Coordination amongR&D, marketing andproduct development
Value Creating Activities Common to aDifferentiation Business Level Strategy
ValueCreatingActivities Common to a
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Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n
d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Primary Activities
S u p p o r
t
A c t
i v i t i e s
A companywideemphasis on producinghigh quality products
Highly Developed InformationSystems to better understandcustomers purchasing preferences
Compensation programsintended to encourage workercreativity and productivity
Extensive use of subjectiverather than objectiveperformance measures
Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product
Rapid responsesto customersuniquemanufacturingspecifications
Consistentmanufacturing of attractiveproducts
Accurate andresponsive orderprocessingprocedures
Complete fieldstocking of replacement parts
Strongcapability inbasic research
Investments in technologies that willallow the firm to consistently producehighly differentiated products
Systems and procedures used to findthe highest quality raw materials
Purchase of highest qualityreplacement parts
Rapid and timelyproduct deliveriesto customers
Superiorpersonneltraining
Coordination among R&D,product development andmarketing
Extensivepersonalrelationshipswith buyers
Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment
PremiumPricing
Human Resource Management
Human Resource ManagementCompensation programswhich encourage workercreativity and productivity
Extensive use of subjective performancemeasures
Superiorpersonneltraining
Value Creating Activities Common to aDifferentiation Business Level Strategy
ValueCreatingActivities Common to a
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Technological Development
Human Resource ManagementFirm Infrastructure
Procurement
I n b o u n d
L o g
i s t i c s
O p e r a t
i o n s
O u t
b o u n
d
L o g
i s t i c s
M a r
k e t i n g
& S a l e s
S e r v
i c e
Primary Activities
S u p p o r
t
A c t
i v i t i e s
A companywideemphasis on producinghigh quality products
Highly Developed InformationSystems to better understandcustomers purchasing preferences
Compensation programsintended to encourage workercreativity and productivity
Extensive use of subjectiverather than objectiveperformance measures
Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product
Rapid responsesto customersuniquemanufacturingspecifications
Consistentmanufacturing of attractiveproducts
Accurate andresponsive orderprocessingprocedures
Complete fieldstocking of replacement parts
Strongcapability inbasic research
Investments in technologies that willallow the firm to consistently producehighly differentiated products
Systems and procedures used to findthe highest quality raw materials
Purchase of highest qualityreplacement parts
Rapid and timelyproduct deliveriesto customers
Superiorpersonneltraining
Coordination among R&D,product development andmarketing
Extensivepersonalrelationshipswith buyers
Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment
PremiumPricing
Firm Infrastructure
Firm InfrastructureA companywide emphasison producing high qualityproducts
Highly developed InformationSystems to better understandcustomers purchasing preferences
Value Creating Activities Common to aDifferentiation Business Level Strategy
Differentiation B i L l St t
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Effectiveness with Differentiation
grows out of Value Chain activitiesExamples:
Heineken beer Raw materials
Caterpillar tractors Service buyers needs quickly
anywhere in the world
Intel microprocessors Technological superiority
Steinway pianos Raw materials & Workmanship
Mercedes Benz autos Technology and Workmanship
Differentiation Business Level Strategy
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Creating barriers by perceptions of uniqueness
Creating switching costs through differentiation
Raising Buyers Performance
Lowering Buyers Costs
Creating Sustainability through:
Create Value with Differentiation by:
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Drivers of Differentiation
Unique product features
Unique product performance
Exceptional services
Quality of inputs
New technologies
Exceptional skill or experience
Detailed information
Examples:
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Effective Differentiators can remain profitable even when the
Five Forces appear unattractive
Effective Differentiators can remain profitable even
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Effective Differentiators can remain profitable evenwhen the Five Forces appear unattractive
Threat of NewEntrants
Can fend off New Entrantsbecause:
New products mustsurpass proven products*
Or be equal to performanceat lower prices
*
Effective Differentiators can remain profitable even
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Can mitigate Buyer Power because:
Well differentiated products reducecustomer sensitivity to price increases
BargainingPower of
Buyers
Threat of New
Entrants
Can fend off New Entrants because:New products mustsurpass proven products
*
Or be equal to performanceat lower prices
*
Effective Differentiators can remain profitable evenwhen the Five Forces appear unattractive
Effective Differentiators can remain profitable even
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Threat of New
Entrants
Can fend off New Entrants because:New products mustsurpass proven products
*
Or be equal to performanceat lower prices
*
BargainingPower of Suppliers
Well positioned relative to
Substitutes because:Brand loyalty tends toreduce new product trial
and brand switching
*
Threat of Substitute
Products
Can mitigate Buyer Powerbecause well differentiatedproducts reduce customersensitivity to price increases
Effective Differentiators can remain profitable evenwhen the Five Forces appear unattractive
Effective Differentiators can remain profitable even
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BargainingPower of Suppliers
Threat of New
Entrants
Can fend off New Entrants because:New products mustsurpass proven products
*
Or be equal to performanceat lower prices
*
BargainingPower of Suppliers
Can mitigate Buyer Powerbecause well differentiatedproducts reduce customersensitivity to price increases
Effective Differentiators can remain profitable evenwhen the Five Forces appear unattractive
Threat of SubstituteProducts
Well positioned relative to Substitute s because:
Brand loyalty tends toreduce new product trialand brand switching
*
Can mitigate Supplier Power by:
Absorbing price increases due tohigher margins
*
Passing on higher supplier pricesbecause buyers are brand loyal*
Effective Differentiators can remain profitable even
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Rivalry AmongCompeting Firms
in Industry
Threat of New
Entrants
BargainingPower of Suppliers
BargainingPower of Buyers
Threat of SubstituteProducts
Well positioned relative to Substitute s because:
Brand loyalty tends toreduce new product trialand brand switching
*
Can mitigate Supplier Power by:*
*
Absorbing price increasesdue to higher margins
Passing on higher supplier pricesbecause buyers are brand loyal
Can mitigate Buyer Powerbecause well differentiatedproducts reduce customersensitivity to price increases
pwhen the Five Forces appear unattractive
Can fend off New Entrants because:
New products mustsurpass proven products
*
Or be equal to performanceat lower prices
*
Brand loyaltyovercomes muchprice competition
k f ff
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Customers may decide that thecost of uniqueness is too great
The means of uniqueness may nolonger be valued by customers
Competitors may learn how to imitate Value Chain
Major Risks of a DifferentiationBusiness Level Strategy
Generic Business Level Strategies
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Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
Differen-tiation
Uniqueness
Generic Business Level Strategies
Generic Business Level Strategies
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Breadth of Competitive
Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
CostLeadership
Differen-tiation
FocusedDifferen-
tiation
FocusedLow Cost
Uniqueness
Generic Business Level Strategies
Focused Business Level Strategies
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Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.However, opportunities may exist because:
Focused Business Level Strategies
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 industrywide competitorsFocus can allow you to direct resources to certainvalue chain activities to build competitive advantage
Focused Business Level Strategies
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Bang & Olufsen Upscale electronic components
Iams Company Premium pet foods
Snap-on tools High quality mechanics tools
Focused Business Level StrategiesFocused Business Level Strategies involve the same basic
approach as Broad Market Strategies.However, opportunities may exist because:
Examples:
May be able to retrofit old factories to keep costsdown
Minimize R&D costs by copying innovators
Focused Business Level Strategies
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Custom manufacturers of parts for
Harley-Davidson motorcycles
Focused Business Level StrategiesFocused Business Level Strategies involve the same basic
approach as Broad Market Strategies.However, opportunities may exist because:
Example:
Focused Differentiators may thrive by selecting asmall market that is underserved by large players
Major Risks Involved With a Focused
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Firm may be outfocused by competitors
Large competitor may set its sights on yourniche market
Preferences of niche market may change tomatch those of broad market
Major Risks Involved With a FocusedDifferentiation Business Level Strategy
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Integrated Low Cost/Differentiation Strategy
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Recognize that the Integrated Low Cost/Differentiation business level strategy involves a
Compromise
The risk is that the firm may become Stuck inthe Middle lacking a strong commitment to or expertise with either type of generic strategy
Integrated Low Cost/Differentiation Strategy
Integrated Low Cost/Differentiation Strategy
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Southwest Airlines
Integrated Low Cost/Differentiation Strategy
Use a single aircraft model(Boeing 737)
Use secondary airports
Fly short routes
15 minute turnaround time No meals
No reserved seats
Low Cost
Focus on customer
satisfaction
New flight services for business travelers(phones and faxes)
High level of employeededication
Differentiation