CHAPTER 4CHAPTER 4Business-Level StrategyBusiness-Level Strategy

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““Competitive strategy is about Competitive strategy is about

being different. It means being different. It means

deliberately choosing to perform deliberately choosing to perform

activities differently or to perform activities differently or to perform

different activities than rivals to different activities than rivals to

deliver a unique mix of value.”deliver a unique mix of value.”Michael E. PorterMichael E. Porter

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KKNOWLEDGENOWLEDGE O OBJECTIVESBJECTIVES

1.1. Define business-level strategy.Define business-level strategy.

2.2. Discuss the relationship between customers and Discuss the relationship between customers and business-level strategies in terms of who, what, and how.business-level strategies in terms of who, what, and how.

3.3. Explain the differences among business-level strategies.Explain the differences among business-level strategies.

4.4. Use the five forces of competition model to explain how Use the five forces of competition model to explain how above-average returns can be earned through each above-average returns can be earned through each business-level strategy.business-level strategy.

5.5. Describe the risks of using each of the business-level Describe the risks of using each of the business-level strategies.strategies.

Studying this chapter should provide you with the strategic management knowledge needed to:

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Business-Level Strategy (Defined)Business-Level Strategy (Defined)

• An integrated and coordinated set of An integrated and coordinated set of commitments and actions the firm uses to gain a commitments and actions the firm uses to gain a competitive advantage by exploiting core competitive advantage by exploiting core competencies in specific product markets.competencies in specific product markets.

Strategy and Competitive AdvantageStrategy and Competitive Advantage

• Competitive advantageCompetitive advantage exists when a firm’s exists when a firm’s strategy gives it an edge instrategy gives it an edge in

Attracting customers Attracting customers andand

Defending against competitive forcesDefending against competitive forces

• Convince customers firm’s product / service offers Convince customers firm’s product / service offers superior valuesuperior value

A A good productgood product at a at a low pricelow price

A A superior productsuperior product worth paying more for worth paying more for

A A best-value productbest-value product

Key to Gaining a Competitive Advantage

What Is What Is Competitive Strategy?Competitive Strategy?

• Deals exclusively with a company’s businessDeals exclusively with a company’s businessplansplans to to compete successfullycompete successfully

Specific Specific effortsefforts to to please customersplease customers

Offensive and defensive movesOffensive and defensive movesto to counter maneuverscounter maneuvers of rivals of rivals

ResponsesResponses to prevailing to prevailing market conditionsmarket conditions

InitiativesInitiatives to to strengthen its market positionstrengthen its market position

• Narrower in scopeNarrower in scope than business strategy than business strategy

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Core Competencies and StrategyCore Competencies and Strategy

Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals

Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

Core Core CompetenciesCompetencies

StrategyStrategy

Business-level Business-level StrategyStrategy

An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage

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Customers: Their Relationship to Customers: Their Relationship to Business-Level StrategiesBusiness-Level Strategies

Key IssuesKey Issuesinin

Business-levelBusiness-levelStrategyStrategy

Who will be Who will be served?served?

What needs will What needs will be satisfied?be satisfied?

How will those How will those needs be satisfied?needs be satisfied?

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Effectively Managing Relationships with Effectively Managing Relationships with CustomersCustomers• Firms must manage all aspects of their Firms must manage all aspects of their

relationship with customers.relationship with customers.

Reach:Reach: firm’s success and connection to customers firm’s success and connection to customers

Richness:Richness: depth and detail of two-way flow of depth and detail of two-way flow of information between the firm and the customerinformation between the firm and the customer

Affiliation:Affiliation: facilitation of useful interactions with facilitation of useful interactions with customerscustomers

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Who:Who: Determining the Customers to Determining the Customers to ServeServe• Market segmentationMarket segmentation

A process used to cluster people with similar needs A process used to cluster people with similar needs into individual and identifiable groups.into individual and identifiable groups.

All CustomersAll Customers

IndustrialIndustrialMarketsMarkets

ConsumerConsumerMarketsMarkets

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Market SegmentationMarket Segmentation

• Consumer Markets Consumer Markets

Demographic factorsDemographic factors

Socioeconomic factorsSocioeconomic factors

Geographic factorsGeographic factors

Psychological factorsPsychological factors

Consumption patternsConsumption patterns

Perceptual factorsPerceptual factors

• Industrial MarketsIndustrial Markets

End-use segmentsEnd-use segments

Product segmentsProduct segments

Geographic segmentsGeographic segments

Common buying factor Common buying factor segmentssegments

Customer size Customer size segmentssegments

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TABLETABLE 4.14.1 Basis for Customer SegmentationBasis for Customer Segmentation

Consumer Markets

• Demographic factors (age, income, sex, etc.)

• Socioeconomic factors (social class, stage in the family life cycle)

• Geographic factors (cultural, regional, and national differences)

• Psychological factors (lifestyle, personality traits)

• Consumption patterns (heavy, moderate, and light users)

• Perceptual factors (benefit segmentation, perceptual mapping)

Industrial Markets• End-use segments (identified by SIC code)

• Product segments (based on technological differences or production economics)

• Geographic segments (defined by boundaries between countries or by regional differences within them)

• Common buying factor segments (cut across product market and geographic segments)

• Customer size segments

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What:What: Determining Which Determining Which Customer Needs to SatisfyCustomer Needs to Satisfy

• Customer needs are related to a product’s Customer needs are related to a product’s benefits and features.benefits and features.

• Customer needs are neither right nor wrong, Customer needs are neither right nor wrong, good nor bad.good nor bad.

• Customer needs represent desires in terms of Customer needs represent desires in terms of features and performance capabilities.features and performance capabilities.

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How:How: Determining Core Competencies Determining Core Competencies Necessary to Satisfy Customer Necessary to Satisfy Customer NeedsNeeds

• Firms use core competencies to implement value Firms use core competencies to implement value creating strategies that satisfy customers’ needs.creating strategies that satisfy customers’ needs.

• Only firms with capacity to continuously Only firms with capacity to continuously improve, improve, innovate and upgrade innovate and upgrade their competencies can their competencies can expect to meet and/or exceed customer expect to meet and/or exceed customer expectations across time.expectations across time.

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The Purpose of a Business-Level The Purpose of a Business-Level StrategyStrategy• Business-Level StrategiesBusiness-Level Strategies

Are intended to create differences between the firm’s Are intended to create differences between the firm’s position relative to those of its rivals.position relative to those of its rivals.

• To position itself, the firm must decide whether it To position itself, the firm must decide whether it intends to:intends to:

Perform activities differently orPerform activities differently or

Perform different activities as compared to its rivals.Perform different activities as compared to its rivals.

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Types of Potential Competitive Types of Potential Competitive AdvantageAdvantage• Achieving Achieving lower overall costslower overall costs than rivals than rivals

Performing activities differently (reducing process Performing activities differently (reducing process costs)costs)

• Possessing the capability Possessing the capability to differentiateto differentiate the the firm’s product or service and command a firm’s product or service and command a premium pricepremium price

Performing different (more highly valued) activities.Performing different (more highly valued) activities.

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FIGUREFIGURE 4.14.1 The External EnvironmentThe External Environment

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Competitive ScopeCompetitive Scope

• Broad ScopeBroad Scope

The firm competes in many The firm competes in many customer segments.customer segments.

• Narrow ScopeNarrow Scope

The firm selects a segment or The firm selects a segment or group of segments in the group of segments in the industry and tailors its strategy industry and tailors its strategy to serving them at the to serving them at the exclusion of others.exclusion of others.

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Types of Business-Level StrategiesTypes of Business-Level Strategies

CostCost UniquenessUniqueness

DifferentiationDifferentiationCost LeadershipCost Leadership

Focused Focused DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Integrated Cost Integrated Cost Leadership/ Leadership/

DifferentiationDifferentiation

BroadBroadTargetTarget

NarrowNarrowTargetTarget

Competitive AdvantageCompetitive Advantage

CompetitiveCompetitiveScopeScope

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FIGUREFIGURE 4.24.2 Five Business-Level StrategiesFive Business-Level Strategies

Low-Cost Provider StrategiesLow-Cost Provider Strategies

• Make achievement of Make achievement of meaningful lower costsmeaningful lower coststhan rivals the than rivals the themetheme of firm’s strategy of firm’s strategy

• Include Include features and servicesfeatures and services in product in productoffering that buyers consider offering that buyers consider essentialessential

• Find approaches to Find approaches to achieve a cost advantageachieve a cost advantagein ways in ways difficultdifficult for rivals to for rivals to copy or matchcopy or match

Keys to SuccessKeys to Success

Low-cost leadership means low overall costs, not just low manufacturing or production costs!

Option 1:Option 1: Use lower-cost edge to Use lower-cost edge to under-price competitors and attract under-price competitors and attract price-sensitive buyers in enough price-sensitive buyers in enough numbers to increase total profitsnumbers to increase total profits

Option 2:Option 2: Maintain present price, be Maintain present price, be content with present market share, content with present market share, and use lower-cost edge to earn a and use lower-cost edge to earn a higher profit margin on each unit sold,higher profit margin on each unit sold,thereby increasing total profitsthereby increasing total profits

Translating a Low-Cost Advantage into Translating a Low-Cost Advantage into Higher Profits: Two OptionsHigher Profits: Two Options

Approaches to Securing Approaches to Securing a Cost Advantagea Cost Advantage

Do a better job than rivals ofDo a better job than rivals ofperforming value chain activitiesperforming value chain activities

efficiently and cost effectivelyefficiently and cost effectively

Revamp value chain to bypassRevamp value chain to bypasscost-producing activities that add littlecost-producing activities that add littlevalue from the buyer’s perspective value from the buyer’s perspective

Approach 1

Approach 2Control costs!

By-pass costs!

Approach 1:Approach 1: Controlling the Cost Controlling the Cost DriversDrivers• Capture scale economies; avoid scale diseconomiesCapture scale economies; avoid scale diseconomies• Capture learning and experience curve effectsCapture learning and experience curve effects• Control percentage of capacity utilizationControl percentage of capacity utilization• Pursue efforts to boost sales and spread costs such as Pursue efforts to boost sales and spread costs such as

R&D and advertising over more unitsR&D and advertising over more units• Improve supply chain efficiencyImprove supply chain efficiency• Substitute use of low-cost for high-cost raw materialsSubstitute use of low-cost for high-cost raw materials• Use online systems and sophisticated software to achieve Use online systems and sophisticated software to achieve

operating efficienciesoperating efficiencies• Adopt labor-saving operating methodsAdopt labor-saving operating methods• Use bargaining power to gain concessions from suppliersUse bargaining power to gain concessions from suppliers• Compare vertical integration vs. outsourcingCompare vertical integration vs. outsourcing

• Use direct-to-end-user sales/marketing methodsUse direct-to-end-user sales/marketing methods

• Make greater use of online technology Make greater use of online technology applicationsapplications

• Streamline operations by eliminating low-value-Streamline operations by eliminating low-value-added or unnecessary work stepsadded or unnecessary work steps

• Relocate facilities closer to suppliers or customersRelocate facilities closer to suppliers or customers

• Offer basic, no-frills product/serviceOffer basic, no-frills product/service

• Offer a limited product/service as opposed to a full Offer a limited product/service as opposed to a full product/service lineproduct/service line

Approach 2:Approach 2: Revamping the Value Revamping the Value ChainChain

Wal-Mart’s Approach toWal-Mart’s Approach toManaging Its Value ChainManaging Its Value Chain

Institute extensive information sharing with vendors via online systems

Institute extensive information sharing with vendors via online systems

Pursue global procurement of some items and centralize most purchasing activities

Pursue global procurement of some items and centralize most purchasing activities

Invest in state-of-the-art automation at its distribution centersInvest in state-of-the-art automation at its distribution centers

Strive to optimize the product mix and achieve greater sales turnover

Strive to optimize the product mix and achieve greater sales turnover

Install security systems and store operating procedures that lower shrinkage rates

Install security systems and store operating procedures that lower shrinkage rates

Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites

Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites

Manage and compensate its workforce in a manner to yield lower labor costs

Manage and compensate its workforce in a manner to yield lower labor costs

Keys to Success in AchievingKeys to Success in AchievingLow-Cost LeadershipLow-Cost Leadership

• Scrutinize each cost-creating activity, identifying cost driversScrutinize each cost-creating activity, identifying cost drivers

• Use knowledge about cost drivers to manageUse knowledge about cost drivers to managecosts of each activity down year after yearcosts of each activity down year after year

• Find ways to restructure value chain to eliminateFind ways to restructure value chain to eliminatenonessential work steps and low-value activitiesnonessential work steps and low-value activities

• Work diligently to create cost-conscious corporate culturesWork diligently to create cost-conscious corporate cultures

Feature broad employee participation in continuous cost-Feature broad employee participation in continuous cost-improvement efforts and limited perks for executivesimprovement efforts and limited perks for executives

Strive to operate with exceptionally small corporate staffs Strive to operate with exceptionally small corporate staffs

• Aggressively pursue investments in resources and capabilities that Aggressively pursue investments in resources and capabilities that promise to drive costs out of the businesspromise to drive costs out of the business

• Cost conscious corporate cultureCost conscious corporate culture

• Employee participation in cost-control effortsEmployee participation in cost-control efforts

• Ongoing efforts to benchmark costsOngoing efforts to benchmark costs

• Intensive scrutiny of budget requestsIntensive scrutiny of budget requests

• Programs promoting continuous cost Programs promoting continuous cost improvementimprovement

Successful low-cost producers championfrugality but wisely and aggressivelyinvest in cost-saving improvements !

Characteristics of a Low-Cost Characteristics of a Low-Cost ProviderProvider

• Price competition is vigorousPrice competition is vigorous• Product is standardized or readily availableProduct is standardized or readily available

from many suppliersfrom many suppliers• There are few ways to achieveThere are few ways to achieve

differentiation that have value to buyersdifferentiation that have value to buyers• Most buyers use product in same waysMost buyers use product in same ways• Buyers incur low switching costs Buyers incur low switching costs • Buyers are large and haveBuyers are large and have

significant bargaining powersignificant bargaining power• Industry newcomers use introductory low prices Industry newcomers use introductory low prices

to attract buyers and build customer baseto attract buyers and build customer base

When Does a Low-CostWhen Does a Low-CostStrategy Work Best?Strategy Work Best?

Pitfalls of Low-Cost StrategiesPitfalls of Low-Cost Strategies

• Being overly aggressive in cutting priceBeing overly aggressive in cutting price

• Low cost methods are easily imitated by rivalsLow cost methods are easily imitated by rivals

• Becoming too fixated on reducing costsBecoming too fixated on reducing costsand ignoringand ignoring

Buyer interest in additional featuresBuyer interest in additional features

Declining buyer sensitivity to priceDeclining buyer sensitivity to price

Changes in how the product is usedChanges in how the product is used

• Technological breakthroughs open up cost Technological breakthroughs open up cost reductions for rivalsreductions for rivals

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Cost Leadership StrategyCost Leadership Strategy

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services with features that are goods or services with features that are acceptable to customers at the lowest cost, acceptable to customers at the lowest cost, relative to that of competitors with features that relative to that of competitors with features that are acceptable to customers.are acceptable to customers.

Relatively standardized productsRelatively standardized products

Features acceptable to many customersFeatures acceptable to many customers

Lowest competitive priceLowest competitive price

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Cost Leadership StrategyCost Leadership Strategy

• Cost saving actions required by this strategy:Cost saving actions required by this strategy:

Building efficient scale facilitiesBuilding efficient scale facilities

Tightly controlling production costs and overheadTightly controlling production costs and overhead

Minimizing costs of sales, R&D and serviceMinimizing costs of sales, R&D and service

Building efficient manufacturing facilitiesBuilding efficient manufacturing facilities

Monitoring costs of activities provided by outsidersMonitoring costs of activities provided by outsiders

Simplifying production processesSimplifying production processes

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How to Obtain a Cost AdvantageHow to Obtain a Cost Advantage

Determine Determine and control and control Cost DriversCost Drivers

Reconfigure Value Chain Value Chain if needed

Alter production processAlter production process

Change in automationChange in automation

New distribution channelNew distribution channel

New advertising mediaNew advertising media Direct sales in place of Direct sales in place of

indirect salesindirect sales

New raw materialNew raw material

Forward integrationForward integration

Backward integrationBackward integration Change location relative Change location relative

to suppliers or buyersto suppliers or buyers

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FIGUREFIGURE 4.34.3 Examples of Value-Creating Activities Examples of Value-Creating Activities Associated with the Cost Leadership StrategyAssociated with the Cost Leadership Strategy

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Value-Creating Activities for Cost Value-Creating Activities for Cost LeadershipLeadership• Cost-effective MISCost-effective MIS

• Few management layersFew management layers

• Simplified planningSimplified planning

• Consistent policiesConsistent policies

• Effecting trainingEffecting training

• Easy-to-use manufacturing Easy-to-use manufacturing technologiestechnologies

• Investments in technologiesInvestments in technologies

• Finding low cost raw materialsFinding low cost raw materials

• Monitor suppliers’ Monitor suppliers’ performancesperformances

• Link suppliers’ products to Link suppliers’ products to production processesproduction processes

• Economies of scaleEconomies of scale

• Efficient-scale facilitiesEfficient-scale facilities

• Effective delivery schedulesEffective delivery schedules

• Low-cost transportationLow-cost transportation

• Highly trained sales forceHighly trained sales force

• Proper pricingProper pricing

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Cost Leadership Strategy: Cost Leadership Strategy: CompetitorsCompetitors

• Due to cost leader’s Due to cost leader’s advantageous position:advantageous position:

Rivals hesitate to compete Rivals hesitate to compete on basis of price.on basis of price.

Lack of price competition Lack of price competition leads to greater profits.leads to greater profits.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Rivalry with Existing Competitors

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Cost Leadership Strategy: Cost Leadership Strategy: BuyersBuyers

• Can mitigate buyers’ Can mitigate buyers’ power by:power by: Driving prices far below Driving prices far below

competitors, causing competitors, causing them to exit, thus them to exit, thus shifting power with shifting power with buyers back to the firm.buyers back to the firm.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Bargaining Powerof Buyers

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Cost Leadership Strategy: Cost Leadership Strategy: SuppliersSuppliers

• Can mitigate suppliers’ Can mitigate suppliers’ power by:power by:

Being able to absorb Being able to absorb cost increases due to cost increases due to low cost position.low cost position.

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

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Bargaining Power of Suppliers

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Cost Leadership Strategy: Cost Leadership Strategy: New EntrantsNew Entrants

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

Their need to enter on a Their need to enter on a large scale in order to be large scale in order to be cost competitive.cost competitive.

The time it takes to move The time it takes to move down the learning curve.down the learning curve.

Threat of new

entrants

Bargaining power of suppliers

Rivalryamong

competing firms

Bargaining power of buyers

Threat of substitute products

The Threat of The Threat of Potential EntrantsPotential Entrants

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Cost Leadership Strategy: Cost Leadership Strategy: SubstitutesSubstitutes

• Cost leader is well Cost leader is well positioned to:positioned to:

Make investments to be Make investments to be first to create substitutes.first to create substitutes.

Buy patents developed by Buy patents developed by potential substitutes.potential substitutes.

Lower prices in order to Lower prices in order to maintain value position.maintain value position.

Threat of new

entrants

Bargaining power of suppliers

Rivalryamong

competing firms

Bargaining power of buyers

Threat of substitute products

ProductProductSubstitutesSubstitutes

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Cost Leadership Strategy (cont’d)Cost Leadership Strategy (cont’d)

• Competitive RisksCompetitive Risks

Processes used to produce and distribute good or Processes used to produce and distribute good or service may become obsolete due to competitors’ service may become obsolete due to competitors’ innovations.innovations.

Focus on cost reductions may occur at expense of Focus on cost reductions may occur at expense of customers’ perceptions of differentiationcustomers’ perceptions of differentiation

Competitors, using their own core competencies, may Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy.successfully imitate the cost leader’s strategy.

• Incorporate Incorporate differentiating featuresdifferentiating features that cause that cause buyers to buyers to preferprefer firm’s firm’s product or serviceproduct or service over over brands of rivalsbrands of rivals

• Find ways to differentiate that Find ways to differentiate that create valuecreate value for for buyers and are buyers and are not easily matchednot easily matched or or cheaply cheaply copiedcopied by rivals by rivals

• Not spending moreNot spending more to achieve differentiation to achieve differentiationthanthan the the price premiumprice premium that can be that can be chargedcharged

ObjectiveObjective

Keys to SuccessKeys to Success

Differentiation StrategiesDifferentiation Strategies

Benefits of Successful DifferentiationBenefits of Successful Differentiation

A product / service with unique, appealing attributes allows a firm to

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage

Whichhat is

unique?

• Unique tasteUnique taste – Dr. Pepper – Dr. Pepper• Multiple featuresMultiple features – Microsoft Windows and Office – Microsoft Windows and Office• Wide selectionWide selection and and one-stop shoppingone-stop shopping – Home Depot, – Home Depot,

Amazon.comAmazon.com• Superior serviceSuperior service -- FedEx, Ritz-Carlton -- FedEx, Ritz-Carlton• Spare parts availabilitySpare parts availability – Caterpillar – Caterpillar• Engineering design and performanceEngineering design and performance – Mercedes, BMW – Mercedes, BMW• PrestigePrestige – Rolex – Rolex• Product reliabilityProduct reliability – Johnson & Johnson – Johnson & Johnson• Quality manufactureQuality manufacture – Karastan, Michelin, Toyota – Karastan, Michelin, Toyota• Technological leadershipTechnological leadership – 3M Corporation – 3M Corporation• Top-of-line imageTop-of-line image – Ralph Lauren, Starbucks, Chanel – Ralph Lauren, Starbucks, Chanel

Types of Differentiation ThemesTypes of Differentiation Themes

Sustaining Differentiation:Sustaining Differentiation:Keys to Competitive AdvantageKeys to Competitive Advantage

• Most Most appealing approachesappealing approaches to differentiation to differentiation Those Those hardest for rivals to match or imitatehardest for rivals to match or imitate

Those Those buyers will find most appealingbuyers will find most appealing

• Best choicesBest choices to to gaingain a longer-lasting, more a longer-lasting, more profitable profitable competitive edgecompetitive edge New product innovationNew product innovation

Technical superiorityTechnical superiority

Product quality and reliabilityProduct quality and reliability

Comprehensive customer serviceComprehensive customer service

Unique competitive capabilitiesUnique competitive capabilities

Where to Find DifferentiationWhere to Find DifferentiationOpportunities in the Value ChainOpportunities in the Value Chain

• Purchasing and procurement activitiesPurchasing and procurement activities

• Product R&D and product design activitiesProduct R&D and product design activities

• Production process / technology-related activitiesProduction process / technology-related activities

• Manufacturing / production activitiesManufacturing / production activities

• Distribution-related activitiesDistribution-related activities

• Marketing, sales, and customer service activitiesMarketing, sales, and customer service activities

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

How to Achieve aHow to Achieve aDifferentiation-Based AdvantageDifferentiation-Based Advantage

Approach 1

Incorporate features/attributes that raise theperformance a buyer gets out of the product

Approach 2

Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways

Approach 3

Compete on the basis of superior capabilitiesApproach 4

Incorporate product features/attributes thatlower buyer’s overall costs of using product

Importance of Perceived ValueImportance of Perceived Value

• Buyers seldom pay for value that is not perceivedBuyers seldom pay for value that is not perceived

• Price premium of a differentiation strategy reflectsPrice premium of a differentiation strategy reflects

Value actually deliveredValue actually delivered to the buyer to the buyer

andand

Value perceivedValue perceived by the buyer by the buyer

• Actual and perceived value can differ when buyers Actual and perceived value can differ when buyers are unable to assess their experience with a are unable to assess their experience with a productproduct

Signaling Value as WellSignaling Value as Wellas Delivering Valueas Delivering Value• Incomplete knowledge of buyers causes them toIncomplete knowledge of buyers causes them to

judge value based on such judge value based on such signalssignals as as PricePrice Attractive packagingAttractive packaging Extensive ad campaignsExtensive ad campaigns Ad content and imageAd content and image Seller facilities or professionalism and Seller facilities or professionalism and

personality of employeespersonality of employees Having a list of prestigious customersHaving a list of prestigious customers

• Signals of value Signals of value may be as important as may be as important as actual value actual value whenwhen Nature of differentiation is hard to quantifyNature of differentiation is hard to quantify Buyers are making first-time purchasesBuyers are making first-time purchases Repurchase is infrequentRepurchase is infrequent Buyers are unsophisticatedBuyers are unsophisticated

For Discussion: Your OpinionFor Discussion: Your Opinion

A low-cost provider strategy can defeat a A low-cost provider strategy can defeat a

differentiation strategy when buyers are satisfied differentiation strategy when buyers are satisfied

with a basic product and don’t think “extra” with a basic product and don’t think “extra”

attributes are worth a higher price. True or false? attributes are worth a higher price. True or false?

Explain.Explain.

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Differentiation StrategyDifferentiation Strategy

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services (at an acceptable cost) that goods or services (at an acceptable cost) that customers perceive as being different in ways customers perceive as being different in ways that are important to them.that are important to them.

Focus is on nonstandardized productsFocus is on nonstandardized products

Appropriate when customers value differentiated Appropriate when customers value differentiated features more than they value low cost.features more than they value low cost.

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How to Obtain a Differentiation How to Obtain a Differentiation AdvantageAdvantage

Control Cost DriversCost Drivers

if needed

Reconfigure Reconfigure Value ChainValue Chain to to maximizemaximize

Lower buyers’ costsLower buyers’ costs

Raise performance of product or serviceRaise performance of product or service

Create sustainability through:Create sustainability through:

Customer perceptions of uniquenessCustomer perceptions of uniqueness Customer reluctance to switch to non-Customer reluctance to switch to non-

unique product or serviceunique product or service

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FigureFigure 4.44.4 Examples of Value-Creating Activities Associated Examples of Value-Creating Activities Associated with the Differentiation Strategywith the Differentiation Strategy

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Value-Creating Activities and Value-Creating Activities and DifferentiationDifferentiation• Highly developed MISHighly developed MIS

• Emphasis on qualityEmphasis on quality

• Worker compensation for Worker compensation for creativity/productivitycreativity/productivity

• Use of subjective performance Use of subjective performance measuresmeasures

• Basic research capabilityBasic research capability

• TechnologyTechnology

• High quality raw materialsHigh quality raw materials

• Delivery of productsDelivery of products

• High quality replacement partsHigh quality replacement parts

• Superior handling of incoming Superior handling of incoming raw materialsraw materials

• Attractive productsAttractive products

• Rapid response to customer Rapid response to customer specificationsspecifications

• Order-processing proceduresOrder-processing procedures

• Customer creditCustomer credit

• Personal relationshipsPersonal relationships

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Differentiation Strategy: Differentiation Strategy: CompetitorsCompetitors

• Defends against Defends against competitors because brand competitors because brand loyalty to differentiated loyalty to differentiated product offsets price product offsets price competition.competition.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Rivalry with Competitors

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Differentiation Strategy: Differentiation Strategy: BuyersBuyers

• Can mitigate buyers’ power Can mitigate buyers’ power because well differentiated because well differentiated products reduce customer products reduce customer sensitivity to price increases.sensitivity to price increases.Threat of

new entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Bargaining Powerof Buyers

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Differentiation Strategy: Differentiation Strategy: SuppliersSuppliers

• Can mitigate suppliers’ Can mitigate suppliers’ power by:power by:

Absorbing price increases Absorbing price increases due to higher margins.due to higher margins.

Passing along higher Passing along higher supplier prices because supplier prices because buyers are loyal to buyers are loyal to differentiated brand.differentiated brand.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Bargaining Power of Suppliers

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Differentiation Strategy: Differentiation Strategy: New EntrantsNew Entrants

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

New products must surpass New products must surpass proven products.proven products.

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

Threat of new

entrants

Bargaining power of suppliers

Rivalryamong

competing firms

Bargaining power of buyers

Threat of substitute products

The Threat of The Threat of Potential EntrantsPotential Entrants

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Differentiation Strategy: Differentiation Strategy: SubstitutesSubstitutes

• Well positioned relative to Well positioned relative to substitutes because:substitutes because:Brand loyalty to a Brand loyalty to a

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

Threat of new

entrants

Bargaining power of suppliers

Rivalryamong

competing firms

Bargaining power of buyers

Threat of substitute products

Product Product SubstitutesSubstitutes

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Competitive Risks of DifferentiationCompetitive Risks of Differentiation• The price differential between the differentiator’s product The price differential between the differentiator’s product

and the cost leader’s product becomes too large.and the cost leader’s product becomes too large.

• Differentiation ceases to provide value for which Differentiation ceases to provide value for which customers are willing to pay.customers are willing to pay.

• Experience narrows customers’ perceptions of the value Experience narrows customers’ perceptions of the value of differentiated features.of differentiated features.

• Counterfeit goods replicate differentiated features of the Counterfeit goods replicate differentiated features of the firm’s products.firm’s products.

When Does a DifferentiationWhen Does a DifferentiationStrategy Work Best?Strategy Work Best?

• There are many ways to differentiate a productThere are many ways to differentiate a productthat have value and please customersthat have value and please customers

• Buyer needs and uses are diverseBuyer needs and uses are diverse

• Few rivals are following a similarFew rivals are following a similardifferentiation approachdifferentiation approach

• Technological change andTechnological change andproduct innovation are fast-pacedproduct innovation are fast-paced

Pitfalls of Differentiation StrategiesPitfalls of Differentiation Strategies

• Appealing product features are easily copied by rivalsAppealing product features are easily copied by rivals

• Buyers see little value in unique attributes of productBuyers see little value in unique attributes of product

• Overspending on efforts to differentiate the product Overspending on efforts to differentiate the product offering, thus eroding profitabilityoffering, thus eroding profitability

• Over-differentiating such that productOver-differentiating such that productfeatures exceed buyers’ needsfeatures exceed buyers’ needs

• Charging a price premiumCharging a price premiumbuyers perceive is too highbuyers perceive is too high

• Not striving to open up meaningful gaps in quality, Not striving to open up meaningful gaps in quality, service, or performance features vis-à-vis rivals’ service, or performance features vis-à-vis rivals’ productsproducts

Focus / Niche StrategiesFocus / Niche Strategies

• Involve concentrated attention on a narrow piece Involve concentrated attention on a narrow piece of the total marketof the total market

Serve niche buyers better than rivalsServe niche buyers better than rivals

• Choose a market niche where buyersChoose a market niche where buyershave distinctive preferences, specialhave distinctive preferences, specialrequirements, or unique needsrequirements, or unique needs

• Develop unique capabilities to serveDevelop unique capabilities to serveneeds of target buyer segmentneeds of target buyer segment

Objective

Keys to Success

• Geographic uniquenessGeographic uniqueness

• Specialized requirements inSpecialized requirements inusing product/serviceusing product/service

• Special product attributesSpecial product attributesappealing only to niche buyersappealing only to niche buyers

Approaches to Defining a Market Approaches to Defining a Market NicheNiche

Examples of Focus StrategiesExamples of Focus Strategies

• Animal Planet and History ChannelAnimal Planet and History Channel Cable TVCable TV

• GoogleGoogle Internet search enginesInternet search engines

• PorschePorsche Sports carsSports cars

• CannondaleCannondale Top-of-the line mountain bikesTop-of-the line mountain bikes

• Enterprise Rent-a-CarEnterprise Rent-a-Car Provides rental cars to repair garage customersProvides rental cars to repair garage customers

• BandagBandag Specialist in truck tire recappingSpecialist in truck tire recapping

Focus / Niche StrategiesFocus / Niche Strategiesand Competitive Advantageand Competitive Advantage

• Achieve lower costs than rivals inAchieve lower costs than rivals inserving a well-defined buyer segment –serving a well-defined buyer segment –

Focused low-cost strategyFocused low-cost strategy

• Offer a product appealing to uniqueOffer a product appealing to uniquepreferences of a well-defined buyer segment –preferences of a well-defined buyer segment –

Focused differentiation strategyFocused differentiation strategy

Approach 1

Approach 2Which hat is unique?

What Makes a NicheWhat Makes a NicheAttractive for Focusing?Attractive for Focusing?

• Big enough to be profitable and offers good Big enough to be profitable and offers good growth potentialgrowth potential

• Not crucial to success of industry leadersNot crucial to success of industry leaders

• Costly or difficult for multi-segment competitorsCostly or difficult for multi-segment competitorsto meet specialized needs of niche membersto meet specialized needs of niche members

• Focuser has resources and capabilitiesFocuser has resources and capabilitiesto effectively serve an attractive nicheto effectively serve an attractive niche

• Few other rivals are specializing in same nicheFew other rivals are specializing in same niche

• Focuser can defend against challengers via Focuser can defend against challengers via superior ability to serve niche memberssuperior ability to serve niche members

Risks of a Focus StrategyRisks of a Focus Strategy

• Competitors find effective ways to matchCompetitors find effective ways to matcha focuser’s capabilities in serving nichea focuser’s capabilities in serving niche

• Niche buyers’ preferences shift towards product Niche buyers’ preferences shift towards product attributes desired by majority of buyers – nicheattributes desired by majority of buyers – nichebecomes part of overall marketbecomes part of overall market

• Segment becomes so attractive it becomes Segment becomes so attractive it becomes crowded with rivals, causing segment profits to crowded with rivals, causing segment profits to be splinteredbe splintered

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Focus StrategiesFocus Strategies

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services that serve the needs of a goods or services that serve the needs of a particular competitive segment.particular competitive segment.

Particular buyer groupParticular buyer group——youths or senior citizensyouths or senior citizens

Different segment of a product lineDifferent segment of a product line——professional professional craftsmen versus do-it-yourselferscraftsmen versus do-it-yourselfers

Different geographic marketsDifferent geographic markets——East coast versus East coast versus West coastWest coast

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Focus Strategies (cont’d)Focus Strategies (cont’d)

• Types of focused strategiesTypes of focused strategies Focused cost leadership strategyFocused cost leadership strategy Focused differentiation strategyFocused differentiation strategy

• To implement a focus strategy, firms must be To implement a focus strategy, firms must be able to:able to: Complete various primary and support activities in a Complete various primary and support activities in a

competitively superior manner, in order to develop competitively superior manner, in order to develop and sustain a competitive advantage and earn above-and sustain a competitive advantage and earn above-average returns.average returns.

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Factors That Drive Focused StrategiesFactors That Drive Focused Strategies• Large firms may overlook small niches.Large firms may overlook small niches.

• A firm may lack the resources needed to compete in the A firm may lack the resources needed to compete in the broader market.broader market.

• A firm is able to serve a narrow market segment more A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors.effectively than can its larger industry-wide competitors.

• Focusing allows the firm to direct its resources to certain Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.value chain activities to build competitive advantage.

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Competitive Risks of Focus StrategiesCompetitive Risks of Focus Strategies• A focusing firm may be “outfocused” by its competitors.A focusing firm may be “outfocused” by its competitors.

• A large competitor may set its sights on a firm’s niche A large competitor may set its sights on a firm’s niche market.market.

• Customer preferences in niche market may change to Customer preferences in niche market may change to more closely resemble those of the broader market.more closely resemble those of the broader market.

Best-Cost Provider StrategiesBest-Cost Provider Strategies

• CombineCombine a a strategic emphasisstrategic emphasis on on low-costlow-cost with with a strategic emphasis on a strategic emphasis on differentiationdifferentiation Make an upscale product at a lower costMake an upscale product at a lower cost

Give customers more value for the moneyGive customers more value for the money

• Deliver superior value by meeting or exceeding Deliver superior value by meeting or exceeding buyer expectations on product attributes and buyer expectations on product attributes and beating their price expectationsbeating their price expectations

• Be the low-cost provider of a product with good-to-Be the low-cost provider of a product with good-to-excellent product attributes, then use cost excellent product attributes, then use cost advantage to underprice comparable brandsadvantage to underprice comparable brands

Objectives

• A best-cost provider’s A best-cost provider’s competitive advantagecompetitive advantage is is based on its capability to include upscale attributes based on its capability to include upscale attributes at a lower cost than rivals’ comparable productsat a lower cost than rivals’ comparable products

• To achieve To achieve competitive advantage,competitive advantage,a company must be able toa company must be able to Incorporate attractive features at a lower cost than rivalsIncorporate attractive features at a lower cost than rivals Manufacture a good-to-excellent quality product at a Manufacture a good-to-excellent quality product at a

lower cost than rivalslower cost than rivals Develop a product that delivers good-to-excellent Develop a product that delivers good-to-excellent

performance at a lower cost than rivalsperformance at a lower cost than rivals Provide attractive customerProvide attractive customer

service at a lower cost than rivalsservice at a lower cost than rivals

Competitive Strength of a Competitive Strength of a Best-Cost Provider Strategy Best-Cost Provider Strategy

When Does a Best-CostWhen Does a Best-CostProvider Strategy Work Best?Provider Strategy Work Best?

• Where buyer diversity makesWhere buyer diversity makesproduct differentiation the norm product differentiation the norm andand

• Where many buyers are alsoWhere many buyers are alsosensitive to price and valuesensitive to price and value

Risk of a Best-Cost Provider StrategyRisk of a Best-Cost Provider Strategy

• A A best-cost providerbest-cost provider may get may get squeezedsqueezed between strategies of firms using between strategies of firms using low-costlow-cost and and differentiationdifferentiation strategies strategies

Low-cost leadersLow-cost leaders may be able to may be able to siphonsiphoncustomerscustomers away with a away with a lower pricelower price

High-end differentiatorsHigh-end differentiators may be able to may be able tosteal customerssteal customers away with away with better product better product attributesattributes

Test Your KnowledgeTest Your KnowledgeWhich of the following are distinguishing features of a best-Which of the following are distinguishing features of a best-cost provider strategy (based on the comparisons of the five cost provider strategy (based on the comparisons of the five generic competitive strategies shown in Figure 5.1)?generic competitive strategies shown in Figure 5.1)?

A.A. The strategic target is price-conscious buyers The strategic target is price-conscious buyers

B.B. A marketing emphasis on charging a slightly higher price A marketing emphasis on charging a slightly higher price than rival brands having comparable features and attributesthan rival brands having comparable features and attributes

C.C. A product line that stresses wide selection, many product A product line that stresses wide selection, many product variations, and emphasis on differentiating featuresvariations, and emphasis on differentiating features

D.D. A competitive advantage based on more value for the money A competitive advantage based on more value for the money

E.E. Using constant product innovation, excellent R&D skills, and Using constant product innovation, excellent R&D skills, and

periodic technological breakthroughs to sustain the strategyperiodic technological breakthroughs to sustain the strategy

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Integrated Cost Leadership/ Integrated Cost Leadership/ Differentiation StrategyDifferentiation Strategy

• A firm that successfully uses an integrated cost A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a leadership/differentiation strategy should be in a better position to:better position to:

Adapt quickly to environmental changes.Adapt quickly to environmental changes.

Learn new skills and technologies more quickly.Learn new skills and technologies more quickly.

Effectively leverage its core competencies while Effectively leverage its core competencies while competing against its rivals.competing against its rivals.

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Integrated Cost Leadership/ Integrated Cost Leadership/ Differentiation Strategy (cont’d)Differentiation Strategy (cont’d)

• Commitment to strategic flexibility is necessary Commitment to strategic flexibility is necessary for implementation of integrated cost for implementation of integrated cost leadership/differentiation strategy.leadership/differentiation strategy.

Flexible manufacturing systems (FMS)Flexible manufacturing systems (FMS)

Information networksInformation networks

Total quality management (TQM) systemsTotal quality management (TQM) systems

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Flexible Manufacturing SystemsFlexible Manufacturing Systems

• Computer-controlled processes used to produce Computer-controlled processes used to produce a variety of products in moderate, flexible a variety of products in moderate, flexible quantities with a minimum of manual quantities with a minimum of manual intervention.intervention.

Goal is to eliminate the “low-cost-versus-wide Goal is to eliminate the “low-cost-versus-wide product-variety” tradeoff.product-variety” tradeoff.

Allows firms to produce large variety of products at Allows firms to produce large variety of products at relatively low costs.relatively low costs.

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Information NetworksInformation Networks

• Link companies electronically with their Link companies electronically with their suppliers, distributors, and customers.suppliers, distributors, and customers.

Facilitate efforts to satisfy customer expectations in Facilitate efforts to satisfy customer expectations in terms of product quality and delivery speed.terms of product quality and delivery speed.

Improve flow of work among employees in the firm Improve flow of work among employees in the firm and their counterparts at suppliers and distributors.and their counterparts at suppliers and distributors.

Customer relationship management (CRM)Customer relationship management (CRM)

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Total Quality Management (Total Quality Management (TQMTQM) ) SystemsSystems• Emphasize total commitment to the customer Emphasize total commitment to the customer

through continuous improvement using:through continuous improvement using: Data-driven, problem-solving approachesData-driven, problem-solving approaches Empowerment of employee groups and teamsEmpowerment of employee groups and teams

• BenefitsBenefits Increased customer satisfactionIncreased customer satisfaction Lower costsLower costs Reduced time-to-market for innovative productsReduced time-to-market for innovative products

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Risks of the Integrated Cost Risks of the Integrated Cost Leadership/ Differentiation StrategyLeadership/ Differentiation Strategy

• Often involves compromisesOften involves compromises Becoming neither the lowest cost nor the most Becoming neither the lowest cost nor the most

differentiated firm.differentiated firm.

• Becoming “stuck in the middle”Becoming “stuck in the middle” Lacking the strong commitment and expertise that Lacking the strong commitment and expertise that

accompanies firms following either a cost leadership accompanies firms following either a cost leadership or a differentiated strategy.or a differentiated strategy.

Deciding Which GenericDeciding Which GenericCompetitive Strategy to UseCompetitive Strategy to Use

• Each positions a company differently in its market and Each positions a company differently in its market and competitive environmentcompetitive environment

• Each establishes a central theme for how a company will Each establishes a central theme for how a company will endeavor to outcompete rivalsendeavor to outcompete rivals

• Each creates some boundaries for maneuvering as Each creates some boundaries for maneuvering as market circumstances unfoldmarket circumstances unfold

• Each points to different ways of experimenting with the Each points to different ways of experimenting with the basics of the strategybasics of the strategy

• Each entails differences in product line, production Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain emphasis, marketing emphasis, and means to sustain the strategythe strategy

The big risk – Selecting a “stuck in the middle” strategy! This rarely produces a sustainable competitive

advantage or a distinctive competitive position!