What Is Business Level Strategy?

Goal-directed actions: “How should we

• To achieve compete?”
competitive advantage • Who: which customer
in a single product segments?
market. • What: customer needs will
we satisfy?
• Why: do we want to satisfy
them?
• How: will we satisfy our
customers’ needs?

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 Industry and Firm Effects Jointly Determine
Competitive Advantage
Exhibit 6.1

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 Strategic Position

A strategic profile based on value creation and

cost in a specific product market.

A valuable and unique position, which:

• Meets customer needs.
• Maximizes product value.
• Lowest possible product cost.

© McGraw Hill
 Strategic Trade-Offs

Choices between a cost OR value position.

Tension between value creation and pressure to

keep cost in check.

Purpose to maximize the firm’s:

• Economic value creation.
• Profit margin.

© McGraw Hill
 Strategic Position and Competitive Scope:
Generic Business Strategies

Exhibit 6.2
Source: Adapted from M.E. Porter (1980),
Competitive Strategy. Techniques for Analyzing
Industries and Competitors (New York: Free Press).
Access the text alternate for slide image.

© McGraw Hill
 Generic Business Strategies

Differentiation: Cost Leadership:

• Seeks to create higher • Seeks to create similar
value vs. competitors. value vs. competitors.
• Offers unique features. • Charges lower prices.
• Charges higher prices.

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Cost Leadership Strategy

An integrated set of actions taken to produce goods or services with

features that are acceptable to customers at the lowest cost, relative
to that of competitors.
Product Characteristics
• Relatively standardized (commoditized) products
• Features broadly acceptable to many customers
• Lowest competitive price
• Eg: McDonald's, Walmart, RyanAir, Primark and IKEA
• Ikea business model
• Ryan air: [Link]

© McGraw Hill 4–7

 Cost Leadership Strategy

Goals:
1. Reduce cost below competitors.
2. Offer adequate value.
3. Reduce prices for customers.
4. Optimize the value chain for low cost.

A cost leader can achieve a competitive advantage

as long as its economic value created (V − C) is
greater than that of its competitors.

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 Cost-Leadership Strategy: Achieving
Competitive Advantage
Exhibit 6.4

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© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Cost Leadership Strategy

Cost saving actions required by this strategy

• Building efficient scale facilities
• Tightly controlling production costs and overhead
• Minimizing costs of sales, R&D and service
• Building efficient manufacturing facilities
• Monitoring costs of activities provided by outsiders
• Simplifying production processes

© McGraw Hill 4–10

 How to Obtain a Cost Advantage

Determine Reconfigure
and control Value Chain
Cost Drivers if needed

▪ Alter production process ▪ New raw material

▪ Change in automation ▪ Forward integration
▪ New distribution channel ▪ Backward integration
▪ New advertising media ▪ Change location relative to
▪ Direct sales in place of suppliers or buyers
indirect sales

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© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Value-Creating Activities for Cost Leadership

© McGraw Hill 4–12

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Value-Creating Activities for Cost Leadership

Cost-effective MIS
Few management layers • Monitor suppliers’
Simplified planning performances
Consistent policies • Link suppliers’ products to
Effecting training production processes
Easy-to-use manufacturing • Economies of scale
technologies • Efficient-scale facilities
Investments in technologies
• Effective delivery
Finding low-cost raw
schedules
materials
• Low-cost transportation
• Highly trained sales force
• Proper pricing

© McGraw Hill 4–13

 Drivers That Keep Costs Low

Cost of input factors:

• Raw materials, capital, labor, and IT services.
Economies of scale:
• Decreases in cost per unit as output increases.
Learning-curve effects:
• Less time to produce output with experience.
Experience-curve effects:
• Improvements to technology and production processes.

© McGraw Hill
 Cost Leadership Strategies: Summary

Focus on:
• Offering lower costs than competitors.
• Maintaining acceptable quality.
Appeals to the bargain-conscious buyer:
• Attracts increased sales.
Can be profitable over a long period of time.

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© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Cost Leadership Strategy: Competitors

Rivalry with Existing

Due to cost leader’s
Competitors
advantageous
position: Threat of
new
• rivals hesitate to entrants
Rivalry
compete on basis of among Bargaining
power of
price. competing
suppliers
firms
• lack of price
competition leads to Threat of
substitute
Bargaining
power of
greater profits. products buyers

© McGraw Hill 4–16

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Cost Leadership Strategy: Buyers

Bargaining Power
Can mitigate buyers’
of Buyers
power by:
• driving prices far Threat of
new
below competitors, entrants
causing them to exit, Rivalry
Bargaining
among
thus shifting power competing power of
suppliers
firms
with buyers
(customers) back to Threat of Bargaining
the firm. substitute
products
power of
buyers

© McGraw Hill 4–17

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Cost Leadership Strategy: Suppliers

Bargaining Power
Can mitigate suppliers’
of Suppliers
power by:
• being able to absorb Threat of
new
cost increases due to entrants
low-cost position. Rivalry
Bargaining
among
power of
• being able to make competing
firms suppliers
very large purchases,
reducing chance of Threat of Bargaining
substitute power of
supplier using power. products buyers

© McGraw Hill 4–18

Cost Leadership Strategy: New Entrants

The Threat of Can frighten off new entrants

Potential Entrants due to:
• their need to enter on a
Threat of large scale in order to be
new cost competitive.
entrants
Rivalry
Bargaining
• the time it takes to move
among
competing power of down the industry learning
firms suppliers curve.

Threat of Bargaining
substitute power of
products buyers

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 Cost Leadership Strategy: Substitutes

Product Cost leader is well positioned to:

Substitutes • lower prices in order to
maintain its value position.
Threat of • make investments to add
new features unavailable in
entrants
Rivalry substitutes.
among Bargaining
competing power of • buy intellectual property and
firms suppliers patents developed by potential
substitutes.
Threat of Bargaining
substitute power of
products buyers

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© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Cost Leadership Strategy Risks

Competitive Risks
• Processes used to produce and distribute good or service may
become obsolete due to competitors’ innovations.
• Too much focus on cost reductions may occur at expense of
customers’ perceptions of differentiation.
• Competitors, using their own core competencies, may
successfully imitate the cost leader’s strategy.

© McGraw Hill 4–21

 Differentiation Strategy

Unique features that increase value, so that

consumers pay a higher price.
The focus of competition:
• Unique product features.
• Service.
• New product launches.
• Marketing and promotion.
Competitive advantage achieved when:
• Value – Cost > Competitors.

© McGraw Hill
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Differentiation Strategy

An integrated set of actions taken to produce goods or services (at an

acceptable cost) that customers perceive as being different in ways
that are important to them.
• Focus is on non-standardized products
• Appropriate when customers value differentiated features
more than they value low cost
• Eg: Tesla, Apple, Lego, Harley-Davidson, Starbucks

© McGraw Hill 4–23

 Differentiation Strategy: Achieving Competitive
Advantage
Exhibit 6.3

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© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

The Story of Lego

[Link]

© McGraw Hill 1–25

 How to Obtain a
Differentiation Advantage

Control Reconfigure
Cost Drivers if Value Chain to
needed maximize

▪ Lower buyers’ costs

▪ Raise performance of product or service
▪ Create sustainability through:
▪ customer perceptions of uniqueness
▪ customer reluctance to switch to non-
unique product or service

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© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Value-Creating Activities and Differentiation

© McGraw Hill 4–27

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Value-Creating Activities and Differentiation

Highly developed MIS • High quality replacement

Emphasis on quality parts
Worker compensation for • Superior handling of
creativity/productivity incoming raw materials
Use of subjective • Attractive products
performance measures
Basic research capability • Rapid response to
Technology customer specifications
High quality raw materials • Order-processing
Delivery of products procedures
• Customer credit
• Personal relationships

© McGraw Hill 4–28

 Three Drivers That Increase Perceived
Value
Product features (Quality, Design and
Performance) – Apple, Starbucks, Lego
• Increase the perceived value of the product or service
offering.
Customer service – Zappos, Crocs
Complements - Tesla
• Add value to a product or service when they are consumed
in tandem.

© McGraw Hill
 Differentiation Strategy: Competitors

Rivalry with Defends against competitors

Existing Competitors because customer’s brand
loyalty to differentiated product
Threat of
offsets price competition.
new
entrants
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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 Differentiation Strategy: Buyers

Bargaining Power Can mitigate buyers’ power

of Buyers because well differentiated
products reduce customer
Threat of
sensitivity to price increases.
new
entrants
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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 Differentiation Strategy: Suppliers

Bargaining Power Can mitigate suppliers’ power by:

of Suppliers • absorbing price increases due
to higher margins.
Threat of
new
• passing along higher supplier
entrants prices because buyers are
Rivalry
Bargaining loyal to a differentiated brand.
among
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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 Differentiation Strategy: New Entrants

The Threat of Can defend against new entrants

Potential Entrants because:
• new products must surpass
Threat of proven products.
new
entrants • new products must be at least
Rivalry
Bargaining equal to performance of proven
among
competing power of products, but offered at lower
suppliers
firms prices.

Threat of Bargaining
substitute power of
products buyers

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 Differentiation Strategy: Substitutes

Product Well-positioned relative to

Substitutes substitutes because:
• brand loyalty to a differentiated
Threat of product tends to reduce
new
entrants
customers’ testing of new
Rivalry products or switching brands.
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Competitive Risks of Differentiation

The price differential between the differentiator’s product and the cost
leader’s product becomes too large.
Differentiation ceases to provide value for which customers are willing
to pay.
Experience narrows customers’ perceptions of the value of
differentiated features.
Counterfeit goods replicate the differentiated features of the firm’s
products.

© McGraw Hill 4–35

 Differentiation Strategies: Summary

Focused on adding value:

• Unique features.
• Customer service.
• Effective marketing.

Can increase costs, for example, if R and D /

innovation needed.

Customers willing to pay a premium.

© McGraw Hill
 Focused Business Strategies

Narrower competitive scope.

Focused Differentiation:
• Royal Enfield: Motorcycle enthusiasts who seek
a classic, rugged, and premium biking experience.

Focused Cost Leadership:

• Zostel: Backpackers, budget travelers, and solo
travelers looking for affordable yet social
accommodations.

© McGraw Hill
 Integrated Cost Leadership/
Differentiation Strategy
A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a better position to:
• adapt quickly to environmental changes.
• learn new skills and technologies more quickly.
• effectively leverage its core competencies while competing
against its rivals.

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 Integrated Cost Leadership/
Differentiation Strategy (cont’d)
Commitment to strategic flexibility is necessary for implementation of
integrated cost leadership/ differentiation strategy.
• Flexible manufacturing systems (FMS)
• Information networks (CRM)
• Total quality management (TQM) systems

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© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Flexible Manufacturing Systems

Computer-controlled processes used to produce a variety of products in

moderate, flexible quantities with a minimum of manual intervention.
• Goal is to eliminate the “low-cost-versus-wide product-variety”
tradeoff
• Allows firms to produce large variety of products at relatively low
costs

© McGraw Hill 4–40

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Information Networks

Link companies electronically with their suppliers, distributors, and

customers.
• Facilitate efforts to satisfy customer expectations in terms of
product quality and delivery speed
• Improve flow of work among employees in the firm and their
counterparts at suppliers and distributors
• Customer relationship management (CRM)

© McGraw Hill 4–41

 Total Quality Management
(TQM) Systems
Emphasize total commitment to the customer through continuous
improvement using:
• data-driven, problem-solving approaches.
• empowerment of employee groups and teams.
Benefits
• Increased customer satisfaction
• Lower input and operating process costs
• Reduced time-to-market for innovative products

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 Risks of an Integrated Cost Leadership/
Differentiation Strategy
Often involves compromises
• Becoming neither the lowest cost nor the most differentiated firm
Becoming “stuck in the middle”
• Lacking the strong commitment and expertise that accompanies
firms following either a cost leadership or a differentiated strategy

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 Successful Business Strategy
A successful strategy:
• Leverages the firm internal strengths.
• Mitigates internal firm weaknesses.
• Exploits external opportunities.
• Avoids external threats.
There is no single correct business strategy for a
specific industry.
Choose a strategy that:
• Provides a strong position that attempts to maximize
economic value creation.
• Is effectively implemented.
© McGraw Hill
 What Is Blue Ocean Strategy?

A strategy that combines both differentiation and

cost-leadership activities.
• A firm offers a differentiated product/service at low cost.
• Examples: Trader Joe’s, Cirque du Soleil.
Uses value innovation to reconcile trade-offs.
Blue oceans represent:
• Untapped market space.
• Creation of additional demand.
• Opportunities for highly profitable growth.
(Red oceans are the known market space of existing
industries.)
© McGraw Hill
 Value Innovation Accomplished through Simultaneously
Pursuing Differentiation (V ↑) and Low Cost (C ↓)

Exhibit 6.9
Source: Adapted from C.W.
Kim and R. Mauborgne
(2005), Blue Ocean
Strategy: How to Create
Uncontested Market Space
and Make Competition
Irrelevant (Boston, MA:
Harvard Business School
Publishing).

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© McGraw Hill
 To Achieve Successful Value Innovation

Lower costs:
• Eliminate: Which of the factors should be eliminated?
• Reduce: Which of the factors should be reduced?

Increase perceived consumer benefits:

• Raise: Which of the factors should be raised?
• Create: Which factors should be created?

It is difficult to succeed at value innovation.

© McGraw Hill
 Value Innovation vs. Stuck in the Middle
Exhibit 6.10

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© McGraw Hill
 The Strategy Canvas

Graphical depiction of a company’s performance:

• Relative to its competitors.
• Shows focus or divergence.

Viewed across the industry’s factors of competition.

Reveals key strategic insights.

© McGraw Hill