5-1© 2006 by Nelson, a division of Thomson Canada Limited.

Business-Level Strategy

Chapter Five

5-2© 2006 by Nelson, a division of Thomson Canada Limited.

Chapter 5Bus. - Level

Strategy

Chapter 6Competitive

Dynamics

Chapter 9International

Strategy

Chapter 10CooperativeStrategies

Chapter 8Acquisitions &Restructuring

Chapter 11Corporate

Governance

Chapter 12Structure& Control

Chapter 13Strategic

Leadership

Chapter 14Entrepreneurship& Innovation

Str

ateg

icIn

pu

ts

Str

ateg

icA

ctio

ns

Str

ateg

icO

utc

om

esChapter 4Internal

Environment

Chapter 3External

Environment Strat . Intent

Strat . Mission

The Strategic .

Management .

Process

Strategy Formulation Strategy Implementation

Strategic Competitiveness

Chapter 1

Above Average Returns

Chapter 2 Feedback

Strategic Competitiveness

Chapter 1

Chapter 7Corp. - Level

Strategy

Chapter 5Bus. – Level Strategy

5-3© 2006 by Nelson, a division of Thomson Canada Limited.

Strategic ManagementCompetitiveness and Globalization

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)

5. Consumption patterns (heavy, moderate, and light users)

6. Perceptual factors (benefit segmentation, perceptual mapping)

7. Brand loyalty patterns

Consumer MarketsBasis for Customer Segmentation

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)

4. Common buying factor segments (cut across product/market and geographic segments)

5. Customer size segments

Industrial Markets

Basis for Customer Segmentation

5-9© 2006 by Nelson, a division of Thomson Canada Limited.

Breadth of Competitive

Scope

BroadTargetMarket

NarrowTargetMarket

Focused Differentiation

CostLeadership

Differentiation

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

Cost Leadership

5-11© 2006 by Nelson, a division of Thomson Canada Limited.

Primary Activities

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

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MARGIN

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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

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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

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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

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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

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ProcurementIn

bo

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Op

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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

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Op

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Mar

keti

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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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Lo

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tics

Lo

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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

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ion

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dL

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Mar

keti

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&

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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

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Act

ivit

ies

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

Inb

ou

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L

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Op

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ion

s

Ou

tbo

un

dL

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Mar

keti

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&

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

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Act

ivit

ies

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

Inb

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ion

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Ou

tbo

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dL

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Mar

keti

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&

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

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tics

Op

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ion

s

Ou

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Mar

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Ser

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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

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L

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Op

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ion

s

Ou

tbo

un

dL

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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

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L

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Op

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ion

s

Ou

tbo

un

dL

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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

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Act

ivit

ies

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

Inb

ou

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L

og

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Op

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ion

s

Ou

tbo

un

dL

og

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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 Strategy and the Five Forces of Competition

Rivalry with Existing Rivalry with Existing CompetitorsCompetitorsCan use cost leadership strategy Can use cost leadership strategy to advantage since:to advantage since:

competitors avoid price wars with cost leaders, creating higher profits for the entire industry

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Bar

gain

ing

Pow

er

Bar

gain

ing

Pow

er

of B

uyer

sof

Buy

ers

Bargaining Power Bargaining Power of Suppliersof Suppliers

Threat of N

ew

Threat of N

ew

Entrants

Entrants

Threat o

f

Threat o

f

Substitute

Products

Substitute

Products

Five Forces ofFive Forces ofCompetitionCompetition

5-23© 2006 by Nelson, a division of Thomson Canada Limited.

Cost Leadership Strategy and the Five Forces of Competition

Bargaining Power of Buyers Bargaining Power of Buyers (Customers)(Customers)

Can mitigate buyers’ power by:Can mitigate buyers’ power by:Driving prices far below competitors and cause exit and shift power back to firm.

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Bar

gain

ing

Pow

er

Bar

gain

ing

Pow

er

of B

uyer

sof

Buy

ers

Bargaining Power Bargaining Power of Suppliersof Suppliers

Threat of N

ew

Threat of N

ew

Entrants

Entrants

Threat o

f

Threat o

f

Substitute

Products

Substitute

Products

Five Forces ofFive Forces ofCompetitionCompetition

5-24© 2006 by Nelson, a division of Thomson Canada Limited.

Cost Leadership Strategy and the Five Forces of Competition

Bargaining Power of SuppliersBargaining Power of Suppliers

Can mitigate suppliers’ power by:Can mitigate suppliers’ power by: being able to absorb cost

increases due to low cost position

being able to make very large purchases, reducing chance of supplier using power

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Bar

gain

ing

Pow

er

Bar

gain

ing

Pow

er

of B

uyer

sof

Buy

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Bargaining Power Bargaining Power of Suppliersof Suppliers

Threat of N

ew

Threat of N

ew

Entrants

Entrants

Threat o

f

Threat o

f

Substitute

Products

Substitute

Products

Five Forces ofFive Forces ofCompetitionCompetition

5-25© 2006 by Nelson, a division of Thomson Canada Limited.

Cost Leadership Strategy and the Five Forces of Competition

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Bar

gain

ing

Pow

er

Bar

gain

ing

Pow

er

of B

uyer

sof

Buy

ers

Bargaining Power Bargaining Power of Suppliersof Suppliers

Threat of N

ew

Threat of N

ew

Entrants

Entrants

Threat o

f

Threat o

f

Substitute

Products

Substitute

Products

Five Forces ofFive Forces ofCompetitionCompetition

Threat of New EntrantsThreat of New Entrants

Can frighten off new entrants due to:Can frighten off new 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

5-26© 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition

Threat of Substitute ProductsThreat of Substitute Products

Well positioned relative to substitutes Well positioned relative to substitutes because:because:

brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands.

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Bar

gain

ing

Pow

er

Bar

gain

ing

Pow

er

of B

uyer

sof

Buy

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Bargaining Power Bargaining Power of Suppliersof Suppliers

Threat of N

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Threat of N

ew

Entrants

Entrants

Threat o

f

Threat o

f

Substitute

Products

Substitute

Products

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

Differentiation

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

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Technological Development

Human Resource Management

Firm Infrastructure

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per

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Ou

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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

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Value Creating Activities common to a Differentiation Business Level Strategy

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

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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

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OperationsOperationsConsistent manufacturing of attractive products

Rapid responses to customers unique manufacturing specifications

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5-33© 2006 by Nelson, a division of Thomson Canada Limited.

Value Creating Activities common to a Differentiation Business Level Strategy

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Technological Development

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Firm Infrastructure

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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

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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

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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

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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

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Value Creating Activities common to a Differentiation Business Level Strategy

5-36© 2006 by Nelson, a division of Thomson Canada Limited.

Su

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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

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Value Creating Activities common to a Differentiation Business Level Strategy

5-37© 2006 by Nelson, a division of Thomson Canada Limited.

Su

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Technological Development

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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

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Value Creating Activities common to a Differentiation Business Level Strategy

5-38© 2006 by Nelson, a division of Thomson Canada Limited.

Su

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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

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Premium Pricing

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Human Resource ManagementHuman Resource ManagementCompensation programs which encourage worker creativity & productivity

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Superior personnel training

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Value Creating Activities common to a Differentiation Business Level Strategy

5-39© 2006 by Nelson, a division of Thomson Canada Limited.

Su

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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

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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 Strategy and the Five Forces of Competition

Rivalry Among Competing Firms Rivalry Among Competing Firms

Can defend against competition because:Can defend against competition because: brand loyalty to differentiated product

offsets price competition

Rivalry Among

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5-41© 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition

Bargaining Power of BuyersBargaining Power of Buyers

Can mitigate buyer power because:Can mitigate buyer power because: well differentiated products

reduce customer sensitivity to price increases

Rivalry Among

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Competing Firms

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5-42© 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition

Bargaining Power of SuppliersBargaining Power of Suppliers

Can mitigate suppliers’ power by:Can mitigate suppliers’ power by: absorbing price increases due to higher

margins passing along higher supplier prices

because buyers are loyal to differentiated brand

Rivalry Among

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5-43© 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition

Threat of New EntrantsThreat of New Entrants

Can defend against new entrants Can defend against new entrants because:because:

new products must surpass proven products or,

new products must be at least equal to performance of proven products, but offered at lower prices

Rivalry Among

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Competing Firms

Competing Firms

Bar

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5-44© 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition

Threat of Substitute ProductsThreat of Substitute Products

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

Rivalry Among

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Competing Firms

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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 Differen-

tiation

CostLeadership

Differen-tiation

Focused Cost

Leadership

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

Leverage core competencies while competing against it’s rivals

Integrated Low Cost/DifferentiationIntegrated Low Cost/Differentiation

5-54© 2006 by Nelson, a division of Thomson Canada Limited.

Flexible Manufacturing Systems

• Information networks

• Total Quality Management Systems

5-55© 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.

5-56© 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