Business-Level Strategy: How do we compete?

1. Business-Level Strategy: How do we compete?

2. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Broad Target Market Breadth of Competitive Scope Narrow Target Market

3. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Broad Target Market Differentiation Breadth of Competitive Scope Narrow Target Market

4. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Broad Target Market Differentiation Breadth of Competitive Scope Focused Differentiation Focused Low Cost Narrow Target Market

5. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Integrated Low Cost/ Differentiation Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market

6. Profit = (P – C) × Q

7. The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. 1994 1995 Cost per unit of output 1996 1997 1998 1999 2000 Cumulative Output

8. Examples of Experience Curves Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71 1960 Yen 15K 20K 30K Price Index 50 100 200 300 75% 70% slope 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units (millions) (millions)

9. Choices that Drive Costs Economies of scale Product features Asset utilization Performance Capacity utilization pattern Mix & variety of products - Seasonal, cyclical Service levels Interrelationships Small vs. large buyers - Order processing and distribution Process technology Value chain linkages Wage levels - Advertising & Sales Product features - Logistics & Operations Hiring, training, motivation

10. Value Chain of Firm Activities Firm Infrastructure Human Resource Management MARGIN Technological Development Procurement Service Inbound Logistics Marketing & Sales Outbound Logistics Operations MARGIN

11. Value Creating Activities common to a Cost Leadership Business Level Strategy Inbound Logistics Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Support Activities Located in Close Proximity with Suppliers Inbound Logistics Primary Activities

12. Efficient Plant Scale to Minimize Mfg. Costs Timing of Asset Purchases Value Creating Activities common to a Cost Leadership Business Level Strategy Policy Choice of Plant Technology Organizational Learning Operations Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Effective Training Programs to Improve Worker Efficiency and Effectiveness Human Resource Management Support Activities MARGIN Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Technological Development Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Efficient Plant Scale to Minimize Manufacturing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Service Inbound Logistics Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Outbound Logistics Timing of Asset Purchases Operations Operations MARGIN Policy Choice of Plant Technology Efficient Order Sizes Organizational Learning Primary Activities

13. Value Creating Activities common to a Cost Leadership Business Level Strategy Outbound Logistics Firm Infrastructure Delivery Schedule that Reduces Costs Human Resource Management Support Activities Selection of Low Cost Transport Carriers MARGIN Technological Development Efficient Order Sizes Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Interrelationships with Sister Units Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Outbound Logistics Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Outbound Logistics Marketing & Sales MARGIN Efficient Order Sizes National Scale Advertising Interrelationships with Sister Units Primary Activities

14. Value Creating Activities common to a Cost Leadership Business Level Strategy Marketing & Sales Firm Infrastructure Small, Highly Trained Sales Force Human Resource Management Support Activities Products Priced to Generate Sales Volume MARGIN Technological Development Procurement National Scale Advertising Service Outbound Logistics Marketing & Sales Marketing & Sales Inbound Logistics Operations MARGIN Primary Activities

15. Value Creating Activities common to a Cost Leadership Business Level Strategy Service Firm Infrastructure Effective Product Installations to Reduce Recalls Human Resource Management Support Activities MARGIN Technological Development Procurement Service Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Primary Activities

16. Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Procurement Service Procurement Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Frequent Evaluation Processes to Monitor Suppliers’ Performances Systems and Procedures to Find the Lowest Cost Products to Purchase Raw Materials Primary Activities

17. Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Technological Development Procurement Technological Development Service Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Outbound Logistics Inbound Logistics Marketing & Sales Operations MARGIN Primary Activities

18. Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Human Resource Management Human Resource Management Support Activities MARGIN Technological Development Human Resource Management Procurement Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Service Outbound Logistics Inbound Logistics Marketing & Sales Operations MARGIN Primary Activities

19. Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Firm Infrastructure Human Resource Management Support Activities MARGIN Firm Infrastructure Technological Development Cost Effective MIS Systems Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Procurement Service Marketing & Sales Outbound Logistics Inbound Logistics Operations MARGIN Primary Activities

20. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products

21. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can frighten off New Entrants due to the need to: Enter at large scale to be Cost Competitive * * Take time to move down the “Learning Curve”

22. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can mitigate Buyer Power by: Bargaining Power of Buyers Driving prices far below competitors may cause exit and shift power back to firm *

23. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Threat of Substitute Products Well positioned relative toSubstitutes in order to: Bargaining Power of Buyers Make investments to create substitutes first * Buy patents developed by potential substitutes * Lower prices to maintain value position *

24. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Can mitigate Supplier Power by: Bargaining Power of Buyers Low cost position makes them better able to absorb cost increases * More likely to make very large purchases which reduces chance of supplier power * Threat of Substitute Products

25. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products

26. Dramatic technological change could take away your cost advantage The Major Risks involved with a Cost Leadership Business Level Strategy Competitors may learn how to imitate Value Chain Focus on efficiency could cause Cost Leader to overlook changes in customer preferences

27. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Narrow Target Market

28. Differentiation Business Level Strategy Key Criteria Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation

29. Drivers of Differentiation Some Examples: Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information

30. Value Creating Activitiescommon to a Differentiation Business Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations MARGIN Primary Activities

31. Firm Infrastructure Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Operations MARGIN Inbound Logistics Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Support Activities Inbound Logistics Primary Activities

32. Firm Infrastructure Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Operations MARGIN Operations Consistent manufacturing of attractive products Support Activities Rapid responses to customers unique manufacturing specifications Operations Primary Activities

33. Firm Infrastructure Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Outbound Logistics Accurate and responsive order processing procedures Support Activities Rapid and timely product deliveries to customers Outbound Logistics Primary Activities

34. Firm Infrastructure Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Marketing & Sales Strong Coordination among functions in R&D, Marketing and Product Development Support Activities Extensive personal relationships with buyers Premium Pricing Marketing & Sales Primary Activities

35. Firm Infrastructure Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Service Complete field stocking of replacement parts Support Activities Service Primary Activities

36. Firm Infrastructure Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Support Activities Procurement Procurement Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Located in Close Proximity with Suppliers Primary Activities

37. Firm Infrastructure Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Support Activities Technological Development Technological Development Coordination among R&D, marketing and product development Investments in technol-ogies to produce highly differentiated products Strong capability in basic research Primary Activities

38. Firm Infrastructure Human Resource Management Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Support Activities Human Resource Management Compensation programs which encourage worker creativity and productivity Extensive use of subjective performance measures Superior personnel training Primary Activities

39. Firm Infrastructure Human Resource Management MARGIN Value Creating Activitiescommon to a Differentiation Business Level Strategy Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Firm Infrastructure Support Activities Firm Infrastructure Highly developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Primary Activities

40. Differentiation Business Level Strategy Effectiveness with Differentiation grows out of Value Chain activities Examples: Heineken beer Raw materials – brand name Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship Intel microprocessors Technological superiority Service buyers’ needs quickly anywhere in the world Caterpillar tractors

41. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices *

42. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can mitigate Buyer Power because: Bargaining Power of Buyers Well differentiated products reduce customer sensitivity to price increases

43. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Threat of Substitute Products Well positioned relative toSubstitutes because: Bargaining Power of Suppliers Brand loyalty tends to reduce new product trial and brand switching *

44. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can mitigate Supplier Power by: Absorbing price increases due to higher margins * Well positioned relative toSubstitutes because: Passing on higher supplier prices because buyers are brand loyal * Brand loyalty tends to reduce new product trial and brand switching * Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Suppliers Threat of Substitute Products

45. Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Effective Differentiators can remain profitable even when the Five Forces appear unattractive Brand loyalty overcomes much price competition Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products

46. Customers may decide that the cost of “uniqueness” is too great The Major Risks involved with a Differentiation Business Level Strategy Competitors may learn how to imitate Value Chain The means of uniqueness may no longer be valued by customers

47. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market

48. Focused Business Level Strategies FocusedBusiness Level Strategies involve the same basic approach as Broad Market Strategies However..... Opportunities may exist because: Large firms may overlook small niches * Firm may lack resources to compete industry wide * * May be able to serve a narrow market segment more effectively than industry-wide competitors

49. Focused Business Level Strategies FocusedBusiness Level Strategies involve the same basic approach as Broad Market Strategies * May be able to retrofit old factories to keep costs down * Minimize R&D costs by copying innovators - Bang & Olufsen Upscale electronic components High quality mechanics’ tools - Snap-On tools Premium pet foods - IAMS

50. Focused Business Level Strategies FocusedBusiness Level Strategies involve the same basic approach as Broad Market Strategies * Focused Differentiators may thrive by selecting a small market that is underserved by large players Custom manufacturers of parts for Harley-Davidson motorcycles