Chapter 4 BusinessLevel Strategy Michael A Hitt R

Strategic Inputs Chapter 2 External Environment Strategic Intent Strategic Mission Chapter 3 Internal Environment Strategy Implementation Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 6 Corporate-Level Strategy Chapter 10 Corporate Governance Chapter 11 Structure & Control Chapter 7 Acquisitions & Restructuring Chapter 8 International Strategy Chapter 9 Cooperative Strategies Chapter 12 Strategic Leadership Chapter 13 Outcomes Strategic Actions Strategy Formulation The Strategic Management Process Feedback Entrepreneurship & Innovation Strategic Competitiveness Above Average Returns Ch 4 -2

Chapter 2 External Environment Chapter 3 Sustainable Competitive Advantage Internal Environment Chapter 4 Business Level Strategy Ch 4 -3

Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. Ch 4 -4

Core Competency Strategy The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Ch 4 -5

Core Competency Strategy Business Level Strategy The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Ch 4 -6

Basis for Customer Segmentation Consumer Markets 1. Demographic factors (age, income, sex, etc. ) 2. Socioeconomic factors (social class, stage in the family life cycle) 3. Geographic factors (culture, region or country differences) 4. Psychological factors (lifestyle, personality traits) 5. Consumption patterns (heavy, moderate, and light users) 6. Perceptual factors (benefit segmentation, perceptual mapping) 7. Brand loyalty patterns Ch 4 -7

Basis for Customer Segmentation Industrial Markets 1. End use segments (identified by SIC 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 Ch 4 -8

Generic Business Level Strategies Source of Competitive Advantage Breadth of Competitive Scope Broad Target Market Narrow Target Market Cost Uniqueness Cost Leadership Differentiation Focused Low Cost Focused Differentiation Ch 4 -9

Cost Leadership Business Level Strategy Key Criteria: Relatively standardized products Features acceptable to many customers Lowest competitive price Ch 4 -10

Cost Leadership Business Level Strategy Requirements: Constant effort to reduce costs through: Building efficient scale facilities Tight control of production costs and overhead Minimizing costs of sales, R&D and service State of the art manufacturing facilities Monitoring costs of activities provided by outsiders Simplification of processes Ch 4 -11

Value Creating Activities Common to a Cost Leadership Business Level Strategy Human Resource Management M A R Technological Development G IN Primary Activities Service A R G IN M Marketing & Sales Outbound Logistics Operations Procurement Inbound Logistics Support Activities Firm Infrastructure Ch 4 -12

Value Creating Activities Common to a Cost Leadership Business Level Strategy Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Human Resource Management M A R Technological Development G IN Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Procurement Monitor Suppliers’ Performances National Scale Advertising Service A R G IN Policy Choice of Efficient Order Plant Technology Sizes M Located in Close Proximity with Suppliers Organizational Learning Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume Marketing & Sales Small, Highly Trained Sales Force Outbound Logistics Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Inbound Logistics Support Activities Cost Effective MIS Systems Interrelationships with Sister Units Primary Activities Ch 4 -13

Value Creating Activities Common to a Inbound Cost Leadership Business Level Strategy Logistics Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Highly Efficient Systems to Link Effective Training Programs to. Management Improve Worker Human Resource Suppliers’ Efficiency and Effectiveness Products with the Easy-to-Use Manufacturing Investments in Technology in order Firm’s Production Technologies to Reduce Costs Associated with Technological Development Manufacturing Processes Consistent Policies to Reduce Turnover Costs Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials M A R G IN Frequent Evaluation Processes to Procurement Monitorin Suppliers’ Located Close. Performances Proximity with Small, Highly Sales Suppliers Trained Force Policy Choice of Efficient Order Plant Technology Sizes National Scale Advertising Organizational Learning M Service A R G IN Located in Close Proximity with Suppliers Marketing & Sales Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume Outbound Logistics Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Inbound Logistics Support Activities Cost Effective MIS Systems Interrelationships with Sister Units Primary Activities Ch 4 -14

Value Creating Activities Common to a Operations Cost Leadership Business Level Strategy Firm Relatively Few Management Layers to Reduce Overhead M Human Resource Management Timing of Asset A Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes R Purchases Technological Development G Policy Choice of Systems and Procedures to find the Frequent Evaluation to Plant. Processes Technology Lowest Cost Products to. Procurement Purchase IN Monitor Suppliers’ Performances Organizational Learning Force Service A R G IN Policy Choice of Efficient Order Plant Technology Sizes Organizational Small, Highly Effective Product Trained Sales Learning Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume National Scale Advertising M Located in Close Proximity with Suppliers Outbound Logistics Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Marketing & Sales Raw Materials Inbound Logistics Support Activities Cost Effective MIS Systems Efficient Plant Scale to Minimize Infrastructure Mfg. Costs Simplified Planning Practices to Reduce Planning Costs Interrelationships with Sister Units Primary Activities Ch 4 -15

Value Creating Activities Common to a Outbound Cost Leadership Business Level Strategy Logistics Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Delivery Schedule that Reduces Costs M Human Resource Management. Selection Aof Low R Easy-to-Use Manufacturing Investments in Technology in order Cost Transport G Technologies to Reduce Costs Associated with Technological Development IN Carriers Manufacturing Processes Systems and Procedures to find the Efficient Order Frequent Evaluation Processes to Lowest Cost Products to. Procurement Purchase Monitor Suppliers’ Performances Sizes Raw Materials Located in Close Proximity with Suppliers Policy Choice of Efficient Order Plant Technology Sizes National Scale Advertising Organizational Learning Marketing & Sales Small, Highly Trained Sales Force Effective Product Interrelationships Installations to Reduce Frequency with Sister Units and Severity Products Priced to of Recalls Generate Sales Volume M Outbound Logistics Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Service A R G IN Effective Training Programs to Improve Worker Efficiency and Effectiveness Consistent Policies to Reduce Turnover Costs Inbound Logistics Support Activities Cost Effective MIS Systems Interrelationships with Sister Units Primary Activities Ch 4 -16

Value Creating Activities Common to a Marketing Cost Leadership Business Level Strategy & Sales Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Effective Training Programs to Improve Worker Efficiency and Effectiveness Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Human Resource Management Technological Development Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Procurement Monitor Suppliers’ Performances Policy Choice of Efficient Order Plant Technology Sizes National Scale Advertising Organizational Learning N National Scale Advertising Service A R G IN Located in Close Proximity with Suppliers M Products Priced A R to Generate Sales G Volume I Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume Marketing & & Sales Small, Highly Trained Sales Force Outbound Logistics Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Small, Highly Trained Sales Force M Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Inbound Logistics Support Activities Cost Effective MIS Systems Interrelationships with Sister Units Primary Activities Ch 4 -17

Value Creating Activities Common to a Cost Leadership Business Level Strategy Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Service Effective Product Effective Training Programs Installations to Consistent Policies to M to Improve Worker Human Resource. Efficiency Management Reduce Turnover Costs and Effectiveness. Reduce A R Recalls Easy-to-Use Manufacturing Investments in Technology in order G to Reduce Costs Associated with Technological Development Manufacturing Processes IN Technologies Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Procurement Monitor Suppliers’ Performances Policy Choice of Efficient Order Plant Technology Sizes National Scale Advertising Service M Service A R G IN Located in Close Proximity with Suppliers Organizational Learning Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume Marketing & Sales Small, Highly Trained Sales Force Outbound Logistics Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Inbound Logistics Support Activities Cost Effective MIS Systems Interrelationships with Sister Units Primary Activities Ch 4 -18

Value Creating Activities Common to a Cost Leadership Business Level Strategy Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Human Resource Management M A R Technological Development G IN Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Procurement Monitor Suppliers’ Performances Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume Procurement Organizational Learning Interrelationships with Sister Units Primary Activities Frequent Evaluation National Scale Processes to Monitor Advertising Suppliers’ Performances M Systems and Procedures to Find Located in Close Policy Choice of Efficient Order the. Proximity Lowest to with Cost Plant. Products Technology Sizes Suppliers Purchase Raw Materials Service A R G IN Small, Highly Trained Sales Force Marketing & Sales Outbound Logistics Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Inbound Logistics Support Activities Cost Effective MIS Systems Ch 4 -19

Value Creating Activities Common to a Cost Leadership Business Level Strategy Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Human Resource Management M A R Technological Development G IN Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Procurement Monitor Suppliers’ Performances Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume Located in Close Proximity with Suppliers Policy Choice of Efficient Order Plant Technology Sizes National Scale Advertising Organizational Learning Marketing & Sales Outbound Logistics Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes M Easy-to-Use Manufacturing Technologies Operations Technological Development Service A R G IN Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Inbound Logistics Support Activities Cost Effective MIS Systems Interrelationships with Sister Units Primary Activities Ch 4 -20

Value Creating Activities Common to a Cost Leadership Business Level Strategy Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Consistent Policies to Reduce Turnover Costs Effective Training Programs Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Improve Worker Human Resourceto. Efficiency Management and Effectiveness M A R Technological Development G IN Human Procurement Resource Management Generate Sales Volume Policy Choice of Efficient Order Plant Technology Sizes National Scale Advertising Organizational Learning Service A R G IN Located in Close Proximity with Suppliers Cost Transport Carriers M Products with the Costs Firm’s Production Timing of Asset Processes Purchases Effective Product Effective Training Programs Installations to to Improve Worker. Reduce Frequency and Severity Efficiency and Effectiveness Selection of Low Products Priced to of Recalls Delivery Schedule Small, Highly that Reduces Trained Sales Costs Force Marketing & Sales Operations Highly Efficientto Plant Consistent Policies Systems to Link Scale to Minimize Reduce Costs Suppliers’Turnover Manufacturing Frequent Evaluation Processes to Monitor Suppliers’ Performances Outbound Logistics Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Inbound Logistics Support Activities Cost Effective MIS Systems Interrelationships with Sister Units Primary Activities Ch 4 -21

Value Creating Activities Common to a Cost Leadership Business Level Strategy Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Human Resource Management M A R Technological Development Firm Infrastructure G IN Policy Choice of Efficient Order Plant Technology Sizes National Scale Advertising M Located in Close Proximity with Suppliers Organizational Learning Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume Marketing & Sales Trained Sales Force Outbound Logistics Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers Operations Systems to Link Suppliers’ Products with the Firm’s Production Processes Service A R G IN Cost. Systems Effective Planning Relatively Few and Procedures to Simplified find the Frequent Evaluation Processes to Cost Products to. Procurement Purchase Suppliers’ Performances MIS Lowest Systems Practices Monitor to Reduce Management Layers Raw Materials Planning Costs Overhead Highly Efficient Plant Delivery Schedule Small, Highly to Reduce Effective Product Inbound Logistics Support Activities Cost Effective MIS Systems Interrelationships with Sister Units Primary Activities Ch 4 -22

How to Obtain a Cost Advantage 1. Determine and Control Cost Drivers 2. Reconfigure the Value Chain as needed Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales New raw material Forward integration Backward integration Change location relative to suppliers or buyers Ch 4 -23

Reconfiguring the Value Chain of Iowa Beef Packers (IBP) Old Way: New Way: Way Ranch Cattle Ship “on the Hoof” to Rail Center (Chicago) Locate large automated plants near ranches Slaughter into sides of beef Process into “Boxed Cuts” at plants “Boxed Cuts” at Markets Ship cuts already “Boxed” to Markets Save on shipping and cattle weight loss Utilize cheaper non-union rural labor Ch 4 -24

Choices That Drive Costs Economies of scale Product features Asset utilization Performance Capacity utilization pattern - Seasonal, cyclical Mix & variety of products Service levels Interrelationships - Order processing and distribution Small vs. large buyers Value chain linkages - Advertising & Sales - Logistics & Operations Wage levels Process technology Product features Hiring, training, motivation Ch 4 -25

Three Key Questions 1. How can an activity be performed differently or even eliminated? 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs? Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors Ch 4 -26

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Ch 4 -27

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” Ch 4 -28

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” Can mitigate Buyer Power by: * Driving prices far below competitors may cause exit and shift power back to firm Bargaining Power of Buyers Ch 4 -29

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive of Well positioned relative to. Threat New Substitutes in order to: Entrants * Make investments to create substitutes first * Buy patents developed by potential substitutes * Lower prices to maintain value position 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” Bargaining Power of Buyers Can mitigate Buyer Power by: Threat of Substitute Products Driving prices far below competitors which may cause exit and shift power back to firm Ch 4 -30

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Bargaining Power of Suppliers 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” Can mitigate Supplier Power by: Bargaining Power of Buyers * Low cost position makes them better able torelative absorb cost increases Well positioned to Can mitigate Buyer Power by: Substitutes in order to: Driving prices far below large purchases * More likely to make very Threat of competitors which may Can buy patents developed by * which reduces chance Substitute of supplier power cause exit and shift power * Make investments to create substitutes potential substitutes * Lower prices to maintain value position Products back to firm Ch 4 -31

Effective Cost Leaders can remain profitable even when Competitors avoid the Five Forces appear unattractive price wars with Cost Leaders, Can mitigate Supplier Power by: Can frighten offwhich New Entrants due Threat of to the need to: creates higher profits * Low cost position makes them Enter at Large Scale to be New * better able to absorb cost increases Cost Competitive for entire industry Entrants * More likely to make very large * Take time to move down the “Learning Curve” purchases which reduces chance of supplier power Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Well positioned relative to Substitutes in order to: * Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position Bargaining Power of Buyers Can mitigate Buyer Power by: Threat of Substitute Products Driving prices far below competitors which may cause exit and shift power back to firm Ch 4 -32

Major Risks of Cost Leadership Business Level Strategy 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 Ch 4 -33

Generic Business Level Strategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Uniqueness Cost Leadership Narrow Target Market Ch 4 -34

Generic Business Level Strategies Source of Competitive Advantage Breadth of Competitive Scope Broad Target Market Cost Uniqueness Cost Leadership Differentiation Narrow Target Market Ch 4 -35

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 Ch 4 -36

Differentiation Business Level Strategy Requirements: Constant effort to differentiate products through: Developing new systems and processes Shaping perceptions through advertising Quality focus Capability in R&D Maximize Human Resource contributions through low turnover and high motivation Ch 4 -37

Value Creating Activities Common to a Differentiation Business Level Strategy Human Resource Management M A R Technological Development G IN Primary Activities Service A R G IN M Marketing & Sales Outbound Logistics Operations Procurement Inbound Logistics Support Activities Firm Infrastructure Ch 4 -38

Value Creating Activities Common to a Differentiation Business Level Strategy Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior personnel training Coordination among R&D, product development and marketing Investments in technologies that will allow the firm to consistently produce highly differentiated products Human Resource Management Technological Development M A Strong capability in basic research R G IN Purchase of highest quality Procurement replacement parts Systems and procedures used to find the highest quality raw materials Primary Activities M Extensive Rapid and timely personal product deliveries relationships to customers with buyers Marketing & Sales Rapid responses to customers unique manufacturing specifications Outbound Logistics Accurate and responsive order processing procedures Service A R G IN Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Consistent manufacturing of attractive products Operations Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Inbound Logistics Support Activities Firm Infrastructure Premium Pricing Ch 4 -39

Value Creating Activities Common to a Inbound Differentiation Business Level Strategy Logistics Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products of incoming raw Superior personnel M materials to Human Resource Management training A minimize damage R Coordination among R&D, Investments in technologies that will Strong andthe improve the produce capability in GI product development and allow firm to consistently Technological Development marketing highly differentiated products basic research N quality of the final Systems and procedures used to find Purchase of highest quality product Procurement Extensive use of subjective rather than objective performance measures Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Rapid responses to customers unique manufacturing specifications Extensive Rapid and timely personal product deliveries relationships to customers with buyers Primary Activities Marketing & Sales Accurate and responsive order processing procedures Outbound Logistics Consistent manufacturing of attractive products Operations Superior handling of incoming raw materials to minimize damage and improve the quality of the final product replacement parts Service A R G IN the highest quality raw materials M Compensation programs intended to encourage worker creativity and productivity Inbound Logistics Support Activities Firm Infrastructure Superior handling Premium Pricing Ch 4 -40

Value Creating Activities Common to a Operations Differentiation Business Level Strategy Consistent manufacturing of Infrastructure attractive. Superior products Extensive use of subjective Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity rather than. Management objective personnel Human Resource performance measures training M Rapid responses to AR Coordination among R&D, Investments in technologies that will Strong G customers unique product development and allow the firm to consistently produce capability in Technological Development IN marketing highly differentiated manufacturing products basic research Systems and procedures used to find Purchase ofspecifications highest quality Procurement replacement parts the highest quality raw materials Primary Activities M Extensive Rapid and timely personal product deliveries relationships to customers with buyers Marketing & Sales Rapid responses to customers unique manufacturing specifications Outbound Logistics Accurate and responsive order processing procedures Service A R G IN Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Consistent manufacturing of attractive products Operations Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Inbound Logistics Support Activities Firm A companywide emphasis on producing high quality products Premium Pricing Ch 4 -41

Value Creating Activities Common to a Outbound Differentiation Business Level Strategy Logistics Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Accurate and responsive order Compensation programs Extensive use of subjective Superior intended to encourage worker rather than. Management objective personnel M processing Human Resource creativity and productivity performance measures training A procedures R Investments in technologies that will allow the firm to consistently produce highly differentiated products Technological Development Purchase of highest quality Procurement replacement parts Systems and procedures used to find the highest quality raw materials IN Rapid and timely product deliveries to customers Service A R G IN Extensive Rapid and timely personal product deliveries relationships to customers with buyers Marketing & Sales Rapid responses to customers unique manufacturing specifications Outbound Logistics Accurate and responsive order processing procedures Primary Activities G Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Consistent manufacturing of attractive products Operations Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Strong capability in basic research M Coordination among R&D, product development and marketing Inbound Logistics Support Activities Firm Infrastructure Premium Pricing Ch 4 -42

Value Creating Activities Common to a Marketing Differentiation Business Level Strategy & Sales Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Strong Coordination among functions in Compensation programs Extensive use of subjective Superior Marketing intended to encourage worker rather than objective personnel R&D, M Human Resource Management creativity and productivity performance measures training and. AProduct R Coordination among R&D, Investments in technologies that will Strong Development G product development and allow the firm to consistently produce capability in Technological Development highly differentiated products marketing Purchase of highest quality Procurement replacement parts Systems and procedures used to find the highest quality raw materials Service A R G IN Premium Pricing M Extensive Rapid and timely personal product deliveries relationships to customers with buyers Marketing & & Sales Rapid responses to customers unique manufacturing specifications Outbound Logistics Accurate and responsive order processing procedures Primary Activities I Extensive N personal relationships with buyers basic research Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Consistent manufacturing of attractive products Operations Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Inbound Logistics Support Activities Firm Infrastructure Premium Pricing Ch 4 -43

Value Creating Activities Common to a Differentiation Business Level Strategy Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Complete field Compensation programs Extensive use of subjective Superior stocking of intended to encourage worker rather than objective personnel M Human Resource Management replacement creativity and productivity performance measures training A R Coordination among R&D, Investments in technologies that willparts Strong allow the firm to consistently produce Technological Development highly differentiated products product development and marketing capability in basic research G IN Purchase of highest quality Procurement replacement parts Systems and procedures used to find the highest quality raw materials Extensive Rapid and timely personal product deliveries relationships to customers with buyers Primary Activities Marketing & Sales Rapid responses to customers unique manufacturing specifications Outbound Logistics Accurate and responsive order processing procedures Service M Service A R G IN Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Consistent manufacturing of attractive products Operations Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Inbound Logistics Support Activities Firm Infrastructure Service Premium Pricing Ch 4 -44

Value Creating Activities Common to a Differentiation Business Level Strategy Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Support Activities Firm Infrastructure Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior personnel training Coordination among R&D, product development and marketing Investments in technologies that will allow the firm to consistently produce highly differentiated products Human Resource Management Technological Development M A Strong capability in basic research R G IN Purchase of highest quality Procurement replacement parts Procurement Systems and procedures used to find the highest quality raw materials Procurement Systems and procedures to customers unique used to find the highest manufacturing specifications quality raw materials Purchase of highest quality replacement parts Premium Located in Close Proximity with Suppliers M Extensive Rapid and timely personal product deliveries relationships to customers with buyers Marketing & Sales Rapid responses Outbound Logistics Accurate and responsive order processing procedures Service A R G IN Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Consistent manufacturing of attractive products Operations Inbound Logistics Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Pricing Primary Activities Ch 4 -45

Value Creating Activities Common to a Differentiation Business Level Strategy Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior personnel training Coordination among R&D, product development and marketing Investments in technologies that will allow the firm to consistently produce highly differentiated products Human Resource Management Technological Development M A Strong capability in basic research R G IN Purchase of highest quality Procurement replacement parts Systems and procedures used to find the highest quality raw materials Accurate and responsive order processing procedures unique manufacturing specifications product deliveries relationships to customers with buyers Marketing & Sales Outbound Logistics Operations Technological Development Coordination among Investments in technol. R&D, marketing and ogies to produce highly Extensive Rapid responses product development differentiated products Rapid and timely personal to customers Primary Activities Service A R G IN Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Consistent manufacturing of attractive products Strong capability in basic research M Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Inbound Logistics Support Activities Firm Infrastructure Premium Pricing Ch 4 -46

Value Creating Activities Common to a Differentiation Business Level Strategy Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior personnel training Coordination among R&D, product development and marketing Investments in technologies that will allow the firm to consistently produce highly differentiated products Human Resource Management Technological Development M A Strong capability in basic research R G IN Human Procurement Resource Management Extensive Rapid and timely personal product deliveries relationships to customers with buyers Primary Activities Service A R G IN Product Development M Rapid responses to customers unique manufacturing specifications Extensive. Strong use. Coordinof Complete Superior field ation among stocking ofpersonnel subjectivefunctions performance in R&D, replacement parts measures. Marketing and training Accurate and responsive order processing procedures Marketing & Sales minimize damage and improve the quality of the final product Operations Compensation programs Superior Consistent handling of manufacturing which encourage worker of incoming raw attractive materials and to products creativity productivity Purchase of highest quality replacement parts Outbound Logistics Systems and procedures used to find the highest quality raw materials Inbound Logistics Support Activities Firm Infrastructure Premium Pricing Ch 4 -47

Value Creating Activities Common to a Differentiation Business Level Strategy Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior personnel training Coordination among R&D, product development and marketing Investments in technologies that will allow the firm to consistently produce highly differentiated products Human Resource Management Technological Development Firm Infrastructure M A Strong capability in basic research R G IN Extensive Rapid and timely personal product deliveries relationships to customers with buyers Primary Activities M ation among stocking of functions in R&D, replacement parts Marketing and Product Development Marketing & Sales Rapid responses to customers unique manufacturing specifications Outbound Logistics manufacturing of responsive order attractive processing products procedures Operations handling of incoming raw materials to minimize damage and improve the quality of the final product Service A R G IN Highly developed Information. Purchase of highest A companywide emphasis Systems and procedures used to find quality the highest raw. Procurement materials replacement parts Systems to quality better understand on producing high quality customers’ purchasing preferences products Strong Coordin- Complete field Consistent Accurate and Superior Inbound Logistics Support Activities Firm Infrastructure Premium Pricing Ch 4 -48

Differentiation Business Level Strategy Effectiveness with Differentiation grows out of Value Chain activities Examples: Heineken beer Raw materials Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship Intel microprocessors Technological superiority Caterpillar tractors Service buyers’ needs quickly anywhere in the world Ch 4 -49

Create Value with Differentiation by: Lowering Buyers’ Costs Raising Buyers’ Performance Creating Sustainability through: • Creating barriers by perceptions of uniqueness • Creating switching costs through differentiation Ch 4 -50

Drivers of Differentiation Examples: Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information Ch 4 -51

Effective Differentiators can remain profitable even when the Five Forces appear unattractive Ch 4 -52

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 Ch 4 -53

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 Can mitigate Buyer Power because: Well differentiated products reduce customer sensitivity to price increases Bargaining Power of Buyers Ch 4 -54

Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Well positioned relative to Substitutes because: * Brand loyalty tends to reduce new product trial and brand switching Threat of Substitute Products Can fend off New Entrants because: * New products must surpass proven products * Or be equal to performance at lower prices Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Ch 4 -55

Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Can fend off New Entrants because: * New products must surpass proven products * Or be equal to performance at lower prices Can mitigate Supplier Power by: to * Absorbing price increases due. Bargaining Power of higher margins Well positioned relative to Substitutes because: Suppliers * Passing on higher supplier prices loyalty tends to * Brand because buyers are brand loyal reduce new product trial and brand switching Threat of Substitute Products Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Ch 4 -56

Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can mitigate Supplier Power by: * Absorbing price increases due to higher margins * Passing on higher supplier prices because buyers are brand loyal Bargaining Power of Buyers Well positioned relative to Substitutes because: * Brand loyalty tends to reduce new product trial and brand switching Threat of New Entrants Can fend off New Entrants because: Brand loyalty New products must * surpass proven products overcomes much * Or be equal to performance price competition at lower prices Rivalry Among Competing Firms in Industry Threat of Substitute Products Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Ch 4 -57

Major Risks of a Differentiation Business Level Strategy Customers may decide that the cost of “uniqueness” is too great Competitors may learn how to imitate Value Chain The means of uniqueness may no longer be valued by customers Ch 4 -58

Generic Business Level Strategies Source of Competitive Advantage Breadth of Competitive Scope Broad Target Market Cost Uniqueness Cost Leadership Differentiation Narrow Target Market Ch 4 -59

Generic Business Level Strategies Source of Competitive Advantage Breadth of Competitive Scope Cost Uniqueness Broad Target Market Cost Leadership Differentiation Narrow Target Market Focused Low Cost Focused Differentiation Ch 4 -60

Focused Business 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 industrywide competitors Focus can allow you to direct resources to certain value chain activities to build competitive advantage Ch 4 -61

Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: May be able to retrofit old factories to keep costs down Minimize R&D costs by copying innovators Examples: Bang & Olufsen Snap-on tools Iams Company Upscale electronic components High quality mechanics’ tools Premium pet foods Ch 4 -62

Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: Focused Differentiators may thrive by selecting a small market that is underserved by large players Example: Custom manufacturers of parts for Harley-Davidson motorcycles Ch 4 -63

Major Risks Involved With a Focused Differentiation Business Level Strategy Firm may be “outfocused” by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market Ch 4 -64

Generic Business Level Strategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Narrow Target Market Uniqueness Cost Differen. Leadership tiation Integrated Low Cost/ Differentiation Focused Differen. Low Cost tiation Ch 4 -65

Integrated Low Cost/Differentiation Strategy Firms using an Integrated Strategy may: Adapt more quickly Learn new skills and technologies Utilize Flexible Manufacturing Systems to create differentiated products at low costs Leverage core competencies through Information Networks across multiple business units Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs Ch 4 -66

Integrated Low Cost/Differentiation Strategy 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 Ch 4 -67

Integrated Low Cost/Differentiation Strategy Southwest Airlines Low Cost Use a single aircraft model (Boeing 737) Differentiation Focus on customer satisfaction Use secondary airports Fly short routes High level of employee dedication No meals 15 minute turnaround time No reserved seats New flight services for business travelers (phones and faxes) No travel agent reservations Ch 4 -68