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5-1 © 2006 by Nelson, a division of Thomson Canada Limited. Business-Level Strategy Chapter Five © 2006 by Nelson, a division of Thomson Canada Limited.
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5-1© 2006 by Nelson, a division of Thomson Canada Limited.
Business-Level Strategy
Chapter Five
© 2006 by Nelson, a division of Thomson Canada Limited.
5-2© 2006 by Nelson, a division of Thomson Canada Limited.
The Strategic Management
Process
Chapter 5: Bus.-Level Strategy
Chapter 6:Competitive Dynamics
Chapter 7:Corp.-Level
Strategy
Chapter 8:Acquisition & Restructuring
Chapter 9:International
Strategy
Chapter 10:Cooperative
Strategy
Strategy Formulation
Chapter 11:Corporate
Governance
Ch. 12: Org. Structure & Controls
Chapter 13:Strategic
Leadership
Chapter 14:Org. Renewal & Innovation
Strategy Implementation
StrategicActions
Chapter 3:The External Environment
Strategic Competitiveness
Strategic Mission & Strategic Intent
Strategic Objectives & Inputs
Chapter 1: Strategic
ManagementStrategic
Competitiveness Ch. 2: Strat. Mgmt . &
Performance
Chapter 3:The External Environment
Chapter 3:The External Environment
Chapter 4:The Internal Environment
Chapter 5: Bus.-Level Strategy
5-3© 2006 by Nelson, a division of Thomson Canada Limited.
Business Level Strategy
Knowledge Objectives:
1. Define business-level strategies.
2. Discuss the relationship between customers & business-level strategies in terms of who, what and how.
3. Explain the differences among business-level strategies.
4. Use the five forces of competition model to explain how above average returns can be earned through each business-level strategy.
5. Describe the risks of using each of the business-level strategies.
5-4© 2006 by Nelson, a division of Thomson Canada Limited.
Strategy
Business Level Strategy
CoreCompetency
An integrated & coordinated set of actions taken to exploit core competencies & gain a competitive advantage.
Actions taken to provide customers value and gain a competitive advantage by exploiting core competencies in specific, individual product markets.
The resources and capabilities that are determined to be a source of competitive advantage for a firm over its rivals.
Core Competency, Strategy and Business Level Strategy
5-5© 2006 by Nelson, a division of Thomson Canada Limited.
Key Issues of Business-level Strategy
• What good or service to offer customers.What good or service to offer customers.• How to manufacture or create the good or How to manufacture or create the good or
service.service.• How to distribute the good or service in the How to distribute the good or service in the
marketplace.marketplace.
5-6© 2006 by Nelson, a division of Thomson Canada Limited.
The Central Role of Customers
In selecting a business-level strategy, the firm In selecting a business-level strategy, the firm determinesdetermines
1. 1. WhoWho it will serve. it will serve.
2.2. WhatWhat needs those target customers have needs those target customers have that it will satisfy.that it will satisfy.
3.3. HowHow those needs will be satisfied. those needs will be satisfied.
5-7© 2006 by Nelson, a division of Thomson Canada Limited.
1. Demographic factors (age, income, gender, 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)
Consumer MarketsBasis for Customer Segmentation
5. Consumption patterns (heavy, moderate, and light users)
6. Perceptual factors (benefit segmentation, perceptual mapping)
7. Brand loyalty patterns
5-8© 2006 by Nelson, a division of Thomson Canada Limited.
1. End use segments (identified by NAIC code)
2. Product segments (based on technological differences or production economics)
3. Geographic segments (defined by boundaries between countries or by regional differences within them)
Industrial Markets
Basis for Customer Segmentation
4. Common buying factor segments (cut across product/market and geographic segments)
5. Customer size segments
5-9© 2006 by Nelson, a division of Thomson Canada Limited.
Breadth of Competitive
Scope
BroadTargetMarket
NarrowTargetMarket
Focused Differentiation
CostLeadership
Differen-tiation
Focused Cost Leadership
Source of Competitive Advantage
Cost Uniqueness
Generic Business Level Strategies
5-10© 2006 by Nelson, a division of Thomson Canada Limited.
Breadth of Competitive
Scope
BroadTargetMarket
NarrowTargetMarket
Source of Competitive Advantage
Cost Uniqueness
Generic Business Level Strategies
CostLeadership
5-11© 2006 by Nelson, a division of Thomson Canada Limited.
Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
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MARGIN
MARGIN
Su
pp
ort
Act
ivit
ies
Value Creating Activities Common to a Cost Leadership Business Level Strategy
5-12© 2006 by Nelson, a division of Thomson Canada Limited.
Value Creating Activities common to a Cost Leadership Business Level Strategy
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
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isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Pol. to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Timing of Asset
Purchases
Efficient Plant Scale to Minim- ize Manufactur- ing Costs
Selection of Low Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Tech.
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Su
pp
ort
Act
ivit
ies
Procurement
Inb
ou
nd
L
og
isti
cs
Op
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ion
s
Inb
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In
bo
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tics
Lo
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tics
Inbound Logistics
Highly efficient systems to link suppliers’ prod.s with the firm’s production processes
Primary Activities
5-13© 2006 by Nelson, a division of Thomson Canada Limited.
Value Creating Activities common to a Cost Leadership Business Level Strategy
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource ManagementIn
bo
un
d
Lo
gis
tics
MARGIN
MARGIN
Cost Effective MIS Systems
Consistent Policies to Reduce Turnover Costs
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Located in Close Proximity with Suppliers
Su
pp
ort
Act
ivit
ies
ProcurementIn
bo
un
d
Lo
gis
tics
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Ser
vice
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Timing of Asset Purchases
Efficient Plant Scale to Minimize Manufacturing Costs
Selection of Low Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Investments in Technology in order to Reduce Costs Associated with Manufacturing ProcessesFrequent Evaluation Processes to Monitor Suppliers’ Performances
Policy Choice of Plant Technology
Organizational Learning
Efficient Order Sizes
Op
erat
ion
sO
per
atio
ns
OperationsEconomies of scale to reduce production costs
Construction of efficient-scale production facilities
Primary Activities
5-14© 2006 by Nelson, a division of Thomson Canada Limited.
Value Creating Activities common to a Cost Leadership Business Level Strategy
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Policies to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes
Timing of Asset Purchases
Efficient Plant Scale to Minim- ize Manufactur- ing Costs Selection of Low
Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Tech.
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Su
pp
ort
Act
ivit
ies
Ou
tbo
un
dL
og
isti
cs
Ser
vice
Selection of Low Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Efficient Order Sizes
Interrelationships with Sister Units
Ou
tbo
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dO
utb
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nd
Lo
gis
tics
Lo
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tics
Outbound
Logistics
Selection of low cost transport carriers
Delivery schedule that reduces costs
Efficient order sizes
Primary Activities
5-15© 2006 by Nelson, a division of Thomson Canada Limited.
Value Creating Activities common to a Cost Leadership Business Level Strategy
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Pol. to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes
Timing of Asset Purchases
Efficient Plant Scale to Minim- ize Manufactur- ing Costs Selection of Low
Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Tech.
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Su
pp
ort
Act
ivit
ies
Ser
vice
Mar
ketin
g M
arke
ting
& S
ales
& S
ales
Products priced to generate sales volume
Small, highly trained sales force
Marketing & Sales
Primary Activities
5-16© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Pol. to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes
Timing of Asset Purchases
Efficient Plant Scale to Minim- ize Manufactur- ing Costs Selection of Low
Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Tech.
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Su
pp
ort
Act
ivit
ies
Ser
vice
ServiceEffective product installations to reduce recalls
ServiceService
Value Creating Activities common to a Cost Leadership Business Level Strategy
Primary Activities
5-17© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Pol. to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes
Timing of Asset Purchases
Efficient Plant Scale to Minim- ize Manufactur- ing Costs Selection of Low
Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Tech.
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Su
pp
ort
Act
ivit
ies
ProcurementIn
bo
un
d
Lo
gis
tics
Op
erat
ion
s
Ou
tbo
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dL
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Mar
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&
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es
Ser
vice
ProcurementProcurement
Systems and procedures to find the lowest cost products to purchase raw materials
Frequent evaluation processes to monitor suppliers’ performances
Procurement
Value Creating Activities common to a Cost Leadership Business Level Strategy
Primary Activities
5-18© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Pol. to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes
Timing of Asset Purchases
Efficient Plant Scale to Minim- ize Manufactur- ing Costs Selection of Low
Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Tech.
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Su
pp
ort
Act
ivit
ies
Technological Development
Procurement
Ser
vice
Technological DevelopmentTechnological Development
Technological DevelopmentTechnological DevelopmentEasy-to-Use manufacturing technologies
Investments in technology in order to reduce costs associated with manufacturing processes
Value Creating Activities common to a Cost Leadership Business Level Strategy
Primary Activities
5-19© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Pol. to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes
Timing of Asset Purchases
Efficient Plant Scale to Minim- ize Manufactur- ing Costs Selection of Low
Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Tech.
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Su
pp
ort
Act
ivit
ies
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Procurement
Human Resource ManagementHuman Resource Management
Human Resource ManagementConsistent policies to reduce turnover costs
Intense & effective training programs to improve worker efficiency and effectiveness
Value Creating Activities common to a Cost Leadership Business Level Strategy
Primary Activities
5-20© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Pol. to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes
Timing of Asset Purchases
Efficient Plant Scale to Minim- ize Manufactur- ing Costs Selection of Low
Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Tech.
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Su
pp
ort
Act
ivit
ies
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Firm InfrastructureFirm Infrastructure
Firm InfrastructureCost effective MIS systems
Simplified planning policies to reduce planning costs
Relatively few managerial layers to reduce overhead costs
Value Creating Activities common to a Cost Leadership Business Level Strategy
Primary Activities
5-21© 2006 by Nelson, a division of Thomson Canada Limited.
1 Determine and Control Cost Drivers
New distribution channelNew advertising media
Direct sales in place of indirect sales
Alter production processChange in automationNew raw material
Forward integrationBackward integrationAlter location relative to suppliers or buyers
2 Reconfigure the as neededValue Chain
How to Obtain a Cost Advantage
5-22© 2006 by Nelson, a division of Thomson Canada Limited.
Cost Leadership & the 5 Forces of Competition
Can frighten off new Can frighten off new entrants due to:entrants due to:
• Their need to enter on a large scale in order to be cost competitive• The time it takes to move down the learning curve
Threat of New EntrantsThreat of New Entrants
Threat of
Threat of
New Entrants
New EntrantsB
arga
inin
g P
ower
of
Buy
ers
Threat ofSubstitute Products
Bargaining
Pow
er of
Suppliers
Rivalry A
mong
Competing
Firms
Five Forces ofFive Forces ofCompetitionCompetition
5-23© 2006 by Nelson, a division of Thomson Canada Limited.
Cost Leadership & the 5 Forces of Competition
Can mitigate buyers’ power Can mitigate buyers’ power by:by:• Driving prices far below competitors, cause exit & shift power back to firm.
Bargaining Power of Buyers (Customers)Bargaining Power of Buyers (Customers)
Bar
gain
ing
Bar
gain
ing
Pow
er o
f P
ower
of
Buy
ers
Buy
ers
Threat of
New Entrants
Threat ofSubstitute Products
Bargaining
Pow
er of
Suppliers
Rivalry A
mong
Competing
Firms
Five Forces ofFive Forces ofCompetitionCompetition
5-24© 2006 by Nelson, a division of Thomson Canada Limited.
Cost Leadership & the 5 Forces of Competition
Can mitigate suppliers’ Can mitigate suppliers’ power by being able to:power by being able to:
• Absorb cost increases, due to low cost position• Make large purchases, reducing chance of supplier using power
Bargaining Power of SuppliersBargaining Power of Suppliers
Bargaining
Bargaining
Pow
er of P
ower of
SuppliersSuppliers B
arga
inin
g P
ower
of
Buy
ers
Threat of
New Entrants
Threat ofSubstitute Products
Rivalry A
mong
Competing
Firms
Five Forces ofFive Forces ofCompetitionCompetition
5-25© 2006 by Nelson, a division of Thomson Canada Limited.
Cost Leadership & the 5 Forces of Competition
Well positioned relative to Well positioned relative to substitutes because:substitutes because:
Threat of Substitute ProductsThreat of Substitute Products
Threat ofThreat ofSubstitute Substitute ProductsProducts
Bar
gain
ing
Pow
er o
f B
uyer
s
Threat of
New Entrants
Bargaining
Pow
er of
Suppliers
Rivalry A
mong
Competing
Firms
Five Forces ofFive Forces ofCompetitionCompetition
Buy patents developed by potential substitutes
Lower prices to maintain value position
Make investments to create substitutes first
5-26© 2006 by Nelson, a division of Thomson Canada Limited.
Cost Leadership & the 5 Forces of Competition
Can use cost leadership Can use cost leadership strategy to advantage since:strategy to advantage since:
Competitors avoid price wars with cost leaders, creating higher profits for the entire industry
Rivalry with Existing CompetitorsRivalry with Existing Competitors
Rivalry A
mong
Rivalry A
mong
Competing
Competing
Firms
Firms
Bar
gain
ing
Pow
er o
f B
uyer
s
Threat of
New Entrants
Threat ofSubstitute Products
Bargaining
Pow
er of
Suppliers
Five Forces ofFive Forces ofCompetitionCompetition
5-27© 2006 by Nelson, a division of Thomson Canada Limited.
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.
Major Risks of Cost LeadershipBusiness Level Strategy
5-28© 2006 by Nelson, a division of Thomson Canada Limited.
Breadth of Competitive
Scope
BroadTargetMarket
NarrowTargetMarket
CostLeadership
Differen-tiation
Source of Competitive Advantage
Cost Uniqueness
Generic Business Level Strategies
5-29© 2006 by Nelson, a division of Thomson Canada Limited.
Differentiation strategy
“An integrated set of actions designed by a firm to produce or deliver goods or
services that customers perceive as being different in ways that are important to
them.”
5-30© 2006 by Nelson, a division of Thomson Canada Limited.
How to Obtain a Differentiation Advantage
Cost DriversCost Drivers Value ChainValue Chain
Control if neededControl if needed Reconfigure to Reconfigure to maximizemaximize
- customer perceptions of uniqueness- customer perceptions of uniqueness- customer perceptions of uniqueness- customer perceptions of uniqueness
- customer reluctance to switch to non-unique product- customer reluctance to switch to non-unique product- customer reluctance to switch to non-unique product- customer reluctance to switch to non-unique product
• Raise performance of product or serviceRaise performance of product or service
• Lower buyers’ costsLower buyers’ costs
• Create sustainability through:Create sustainability through:
5-31© 2006 by Nelson, a division of Thomson Canada Limited.
Value Creating Activities common to a Differentiation Business Level Strategy
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
ProcurementO
per
atio
ns
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
A companywide emph-asiis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferences
Compensation programs intended to encourage worker creativity & prod.
Extensive use of subjective rather than objective performance measures
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in tech. that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Inbound Inbound LogisticsLogistics
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Inb
ou
nd
In
bo
un
d
Lo
gis
tics
Lo
gis
tics
Su
pp
ort
Act
ivit
ies
Primary Activities
5-32© 2006 by Nelson, a division of Thomson Canada Limited.
Value Creating Activities common to a Differentiation Business Level Strategy
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
Highly Developed Information Systems to better understand customers’ purchasing preferences
Compensation programs intended to encourage worker creativity & prod.
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Systems and procedures used to find the highest quality raw materials
Rapid and timely product deliveries to customers
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Op
erat
ion
sO
per
atio
ns
OperationsOperationsConsistent manufacturing of attractive products
Rapid responses to customers unique manufacturing specifications
Su
pp
ort
Act
ivit
ies
Primary Activities
5-33© 2006 by Nelson, a division of Thomson Canada Limited.
Value Creating Activities common to a Differentiation Business Level Strategy
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
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cs
Op
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ion
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Mar
keti
ng
&
Sal
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Ser
vice
MARGIN
MARGIN
A companywide emph-asiis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferences
Compensation programs intended to encourage worker creativity & prod.
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in tech. that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Ou
tbo
un
dO
utb
ou
nd
Lo
gis
tics
Lo
gis
tics
Outbound Outbound LogisticsLogistics
Accurate and responsive order processing procedures
Rapid and timely product deliveries to customers
Su
pp
ort
Act
ivit
ies
Primary Activities
5-34© 2006 by Nelson, a division of Thomson Canada Limited.
Value Creating Activities common to a Differentiation Business Level Strategy
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
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Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
A companywide emph-asiis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferencesCompensation programs intended to encourage worker creativity & prod.
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in tech. that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Mar
keti
ng
Mar
keti
ng
&
Sal
es&
Sal
es
Marketing Marketing & Sales& Sales
Extensive personal relationships with buyers
Strong coordination among functions in R&D, marketing & product development
Premium pricing
Su
pp
ort
Act
ivit
ies
Primary Activities
5-35© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
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cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
A companywide emph-asiis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferences
Compensation programs intended to encourage worker creativity & prod.
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in tech. that will allow the firm to consistently produce highly differentiated products
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Service
ServiceServiceComplete field stocking of replacement parts
Systems and procedures used to find the highest quality raw materials
Su
pp
ort
Act
ivit
ies
Primary Activities
Value Creating Activities common to a Differentiation Business Level Strategy
5-36© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
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Mar
keti
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&
Sal
es
Ser
vice
MARGIN
MARGIN
A companywide emph-asiis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferencesCompensation programs intended to encourage worker creativity & prod.
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in tech. that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
ProcurementProcurement
ProcurementProcurementLocated in Close Proximity with Suppliers
Systems & procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Su
pp
ort
Act
ivit
ies
Primary Activities
Value Creating Activities common to a Differentiation Business Level Strategy
5-37© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
A companywide emphasis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferencesCompensation programs intended to encourage worker creativity & prod.
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in tech. that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Technological DevelopmentTechnological Development
TechnologicalTechnological DevelopmentDevelopmentStrong capability in basic research
Investments in technol-ogies to produce highly differentiated products
Coordination among R&D, marketing and product development
Su
pp
ort
Act
ivit
ies
Primary Activities
Value Creating Activities common to a Differentiation Business Level Strategy
5-38© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
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isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
A companywide emph-asiis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferences
Compensation programs intended to encourage worker creativity & prod.
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in tech. that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Su
pp
ort
Act
ivit
ies
Human Resource ManagementHuman Resource Management
Human Resource ManagementHuman Resource ManagementCompensation programs which encourage worker creativity & productivity
Extensive use of subjective perform-ance measures
Superior personnel training
Primary Activities
Value Creating Activities common to a Differentiation Business Level Strategy
5-39© 2006 by Nelson, a division of Thomson Canada Limited.
Su
pp
ort
Act
ivit
ies
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
ou
nd
L
og
isti
cs
Op
erat
ion
s
Ou
tbo
un
dL
og
isti
cs
Mar
keti
ng
&
Sal
es
Ser
vice
MARGIN
MARGIN
A companywide emph-asiis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferencesCompensation programs intended to encourage worker creativity & prod.
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in tech. that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product DevelopmentPremium Pricing
Su
pp
ort
Act
ivit
ies
Firm InfrastructureFirm Infrastructure
Firm InfrastructureFirm InfrastructureA company-wide emphasis on producing high quality products
Highly developed info. systems to better understand customers’ purchasing preferences
Primary Activities
Value Creating Activities common to a Differentiation Business Level Strategy
5-40© 2006 by Nelson, a division of Thomson Canada Limited.
Differentiation & the 5 Forces of Competition
Can defend against new Can defend against new entrants since new products:entrants since new products:
• Must surpass proven products or, • Must be at least equal to performance of proven products, but offered at lower prices
Threat of New EntrantsThreat of New Entrants
Threat of
Threat of
New Entrants
New EntrantsB
arga
inin
g P
ower
of
Buy
ers
Threat ofSubstitute Products
Bargaining
Pow
er of
Suppliers
Rivalry A
mong
Competing
Firms
Five Forces ofFive Forces ofCompetitionCompetition
5-41© 2006 by Nelson, a division of Thomson Canada Limited.
Differentiation & the 5 Forces of Competition
Can mitigate buyers’ power Can mitigate buyers’ power because:because:
• Well differentiated products reduce buyer sensitivity to price increases
Bargaining Power of Buyers (Customers)Bargaining Power of Buyers (Customers)
Bar
gain
ing
Bar
gain
ing
Pow
er o
f P
ower
of
Buy
ers
Buy
ers
Threat of
New Entrants
Threat ofSubstitute Products
Bargaining
Pow
er of
Suppliers
Rivalry A
mong
Competing
Firms
Five Forces ofFive Forces ofCompetitionCompetition
5-42© 2006 by Nelson, a division of Thomson Canada Limited.
Differentiation & the 5 Forces of Competition
Can mitigate suppliers’ Can mitigate suppliers’ power by being able to:power by being able to:
• Absorb price increases
due to higher margins• Pass along higher supplier prices since buyers are loyal to differentiated brand
Bargaining Power of SuppliersBargaining Power of Suppliers
Bargaining
Bargaining
Pow
er of P
ower of
SuppliersSuppliers B
arga
inin
g P
ower
of
Buy
ers
Threat of
New Entrants
Threat ofSubstitute Products
Rivalry A
mong
Competing
Firms
Five Forces ofFive Forces ofCompetitionCompetition
5-43© 2006 by Nelson, a division of Thomson Canada Limited.
Differentiation & the 5 Forces of Competition
Well positioned relative to Well positioned relative to substitutes because:substitutes because:
• Brand loyalty to a differentiated product tends to reduce
customers’ testing of new products or switching brands.
Threat of Substitute ProductsThreat of Substitute Products
Threat ofThreat ofSubstitute Substitute ProductsProducts
Bar
gain
ing
Pow
er o
f B
uyer
s
Threat of
New Entrants
Bargaining
Pow
er of
Suppliers
Rivalry A
mong
Competing
Firms
Five Forces ofFive Forces ofCompetitionCompetition
5-44© 2006 by Nelson, a division of Thomson Canada Limited.
Differentiation & the 5 Forces of Competition
Can defend against new Can defend against new entrants because:entrants because:
brand loyalty to differentiated product offsets price competition
Rivalry with Existing CompetitorsRivalry with Existing Competitors
Rivalry A
mong
Rivalry A
mong
Competing
Competing
Firms
Firms
Bar
gain
ing
Pow
er o
f B
uyer
s
Threat of
New Entrants
Threat ofSubstitute Products
Bargaining
Pow
er of
Suppliers
Five Forces ofFive Forces ofCompetitionCompetition
5-45© 2006 by Nelson, a division of Thomson Canada Limited.
Customers may decide that the differentiation between the differentiator’s product and the cost leaders price is too large.
A firm’s means of differentiation may cease to provide value for which customers are willing to pay.
The means of uniqueness may no longer be valued by customers.
Major Risks of a DifferentiationBusiness Level Strategy
5-46© 2006 by Nelson, a division of Thomson Canada Limited.
Breadth of Competitive
Scope
BroadTargetMarket
NarrowTargetMarket
Focused Focused Differen-Differen-
tiationtiation
CostLeadership
Differen-tiation
Focused Focused Cost Cost
LeadershipLeadership
Source of Competitive Advantage
Cost Uniqueness
Generic Business Level Strategies
5-47© 2006 by Nelson, a division of Thomson Canada Limited.
Focus Strategies
Focus strategies are an integrated set of actions designed to produce or deliver
goods or services that serve the needs of a particular competitive segment.
5-48© 2006 by Nelson, a division of Thomson Canada Limited.
However...Opportunities may exist because: Firm may lack resources to
compete industry wide. Large firms may overlook small Large firms may overlook small
niches.niches. The firm may be able to serve a
narrow market segment more effectively than industry wide competitors.
Focus can allow you to direct Focus can allow you to direct resources to certain value chain resources to certain value chain activities to build competitive activities to build competitive advantage.advantage.
Focused Business Level Strategies
Focused Business Level Strategies involve the same basic approach as Broad Market Strategies.
*
5-49© 2006 by Nelson, a division of Thomson Canada Limited.
- Purdy’s Chocolates High quality chocolates
Minimize R&D costs by copying innovators
**
Differentiated features with low cost products**
Focused Business Level Strategies involve the same basic approach as Broad Market Strategies.
Focused Business Level Strategies
- Ikea Good design & function at low prices
5-50© 2006 by Nelson, a division of Thomson Canada Limited.
Focused Differentiators may thrive by selecting a small market that is underserved by large players.
**Focused Business Level Strategies involve the same basic approach as Broad Market Strategies.
Focused Business Level Strategies
an *
5-51© 2006 by Nelson, a division of Thomson Canada Limited.
Firm may be “out focused” by competitors.
Large competitor may set its sights on your niche market.
Preferences of niche market may change to match those of broad market.
Major Risks Involved With a FocusedDifferentiation Business Level Strategy
5-52© 2006 by Nelson, a division of Thomson Canada Limited.
Breadth of Competitive
Scope
BroadTargetMarket
NarrowTargetMarket
Focused Differen-
tiation
CostLeadership
Differen-tiation
Focused Cost
Leadership
Source of Competitive Advantage
Cost Uniqueness
Integrated Integrated Low Cost/Low Cost/
DifferentiationDifferentiation
Generic Business Level Strategies
5-53© 2006 by Nelson, a division of Thomson Canada Limited.
Firms using an Integrated Strategy may:
Adapt more quicklyLearn new skills and technologies
May utilize Flexible Manufacturing Systems to create differentiated products at low costs via
Leverage core competencies while competing against it’s rivals
Integrated Low Cost/DifferentiationIntegrated Low Cost/Differentiation
• Information networks• Total Quality Management Systems
5-54© 2006 by Nelson, a division of Thomson Canada Limited.
Total Quality Management - TQM
1. Meeting customer expectations while striving to exceed them.
2. Focusing on work activities to drive out waste.
3. Focus on “Continuous Improvement”.
4. Develop the flexibility to spot opportunities to simultaneously increase differentiation and /or drive out costs.
An Integrated Strategy will also call for TQM:
5-55© 2006 by Nelson, a division of Thomson Canada Limited.
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
5-56© 2006 by Nelson, a division of Thomson Canada Limited.
The Strategic Management
Process
Chapter 5: Bus.-Level Strategy
Chapter 6:Competitive Dynamics
Chapter 7:Corp.-Level
Strategy
Chapter 8:Acquisition & Restructuring
Chapter 9:International
Strategy
Chapter 10:Cooperative
Strategy
Strategy Formulation
Chapter 11:Corporate
Governance
Ch. 12: Org. Structure & Controls
Chapter 13:Strategic
Leadership
Chapter 14:Org. Renewal & Innovation
Strategy Implementation
StrategicActions
Chapter 3:The External Environment
Strategic Competitiveness
Strategic Mission & Strategic Intent
Strategic Objectives & Inputs
Chapter 1: Strategic
ManagementStrategic
Competitiveness Ch. 2: Strat. Mgmt . &
Performance
Chapter 3:The External Environment
Chapter 3:The External Environment
Chapter 4:The Internal Environment
Chapter 5: Bus.-Level Strategy
