Business-Level Strategy Chapter Five © 2006 by Nelson, a division of Thomson Canada Limited.

© 2006 by Nelson, a division of Thomson Canada Limited. Chapter 4 Internal Environment Chapter 3 External Strat . Intent . Mission Strategic Inputs Strategic The . Management . Process Strategy Formulation Strategy Implementation Strategic Actions Chapter 5 Bus. – Level Strategy Chapter 5 Chapter 6 Chapter 7 Chapter 11 Chapter 12 Bus. - Level Competitive Corp. - Level Corporate Structure Strategy Dynamics Strategy Governance & Control Chapter 8 Chapter 9 Chapter 10 Chapter 13 Chapter 14 Acquisitions & International Cooperative Strategic Entrepreneurship Restructuring Strategy Strategies Leadership & Innovation Strategic Outcomes Feedback Above Average Returns Chapter 2 Strategic Competitiveness Chapter 1 Strategic Competitiveness Chapter 1 © 2006 by Nelson, a division of Thomson Canada Limited.

Core Competency, Strategy and Business Level Strategy The resources and capabilities that are determined to be a source of competitive advantage for a firm over its rivals. An integrated & coordinated set of actions taken to exploit core competencies & gain a competitive advantage. Strategy Actions taken to provide customers value and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Business Level Strategy © 2006 by Nelson, a division of Thomson Canada Limited. 7

Key Issues of Business-level Strategy What good or service to offer customers. How to manufacture or create the good or service. How to distribute the good or service in the marketplace. © 2006 by Nelson, a division of Thomson Canada Limited.

The Central Role of Customers In selecting a business-level strategy, the firm determines 1. Who it will serve. 2. What needs those target customers have that it will satisfy. 3. How those needs will be satisfied. © 2006 by Nelson, a division of Thomson Canada Limited.

Basis for Customer Segmentation Consumer Markets 1. Demographic factors (age, income, gender, etc.) 2. Socioeconomic factors (social class, stage in the family life cycle) 3. Geographic factors (culture, region or country differences) 4. Psychological factors (lifestyle, personality traits) 5. Consumption patterns (heavy, moderate, and light users) 6. Perceptual factors (benefit segmentation, perceptual mapping) 7. Brand loyalty patterns © 2006 by Nelson, a division of Thomson Canada Limited.

Basis for Customer Segmentation Industrial Markets 1. End use segments (identified by NAIC code) 2. Product segments (based on technological differences or production economics) 3. Geographic segments (defined by boundaries between countries or by regional differences within them) 4. Common buying factor segments (cut across product/market and geographic segments) 5. Customer size segments © 2006 by Nelson, a division of Thomson Canada Limited.

Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Breadth of Competitive Scope Broad Target Market Narrow Cost Leadership Differentiation Focused Cost Leadership Focused Differentiation © 2006 by Nelson, a division of Thomson Canada Limited. 10

Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Breadth of Competitive Scope Broad Target Market Narrow Cost Leadership © 2006 by Nelson, a division of Thomson Canada Limited. 10

Human Resource Management Technological Development Value Creating Activities Common to a Cost Leadership Business Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Inbound Logistics Marketing & Sales Outbound Logistics MARGIN Operations Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Inbound Logistics Firm Infrastructure Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Cost Effective MIS Systems Highly efficient systems to link suppliers’ prod.s with the firm’s production processes Human Resource Management Effective Training Programs to Improve Worker Efficiency and Effectiveness Support Activities Support Activities Consistent Pol. to Reduce Turnover Costs MARGIN Easy-to-Use Manufacturing Technologies Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Efficient Plant Scale to Minim- ize Manufactur- ing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Outbound Logistics Inbound Logistics Service Inbound Logistics Inbound Logistics Operations Operations Selection of Low Cost Transport Carriers Marketing & Sales Products Priced to Generate Sales Volume Timing of Asset Purchases MARGIN Located in Close Proximity with Suppliers Policy Choice of Plant Tech. Efficient Order Sizes National Scale Advertising Organizational Learning Interrelationships with Sister Units Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Operations Relatively Few Management Layers to Reduce Overhead Cost Effective MIS Systems Simplified Planning Practices to Reduce Planning Costs Economies of scale to reduce production costs Support Activities Support Activities Human Resource Management Effective Training Programs to Improve Worker Efficiency and Effectiveness Consistent Policies to Reduce Turnover Costs MARGIN Easy-to-Use Manufacturing Technologies Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Construction of efficient-scale production facilities Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Efficient Plant Scale to Minimize Manufacturing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Outbound Logistics Inbound Logistics Operations Inbound Logistics Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Timing of Asset Purchases MARGIN Operations Located in Close Proximity with Suppliers Policy Choice of Plant Technology Efficient Order Sizes National Scale Advertising Organizational Learning Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Outbound Logistics Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Cost Effective MIS Systems Firm Infrastructure Delivery schedule that reduces costs Support Activities Support Activities Human Resource Management Effective Training Programs to Improve Worker Efficiency and Effectiveness Consistent Policies to Reduce Turnover Costs MARGIN Easy-to-Use Manufacturing Technologies Selection of low cost transport carriers Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Frequent Evaluation Processes to Monitor Suppliers’ Performances Efficient order sizes Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Efficient Plant Scale to Minim- ize Manufactur- ing Costs Delivery Schedule that Reduces Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Effective Product Installations to Reduce Frequency and Severity of Recalls Service Service Outbound Logistics Outbound Logistics Inbound Logistics Outbound Logistics Selection of Low Cost Transport Carriers Selection of Low Cost Transport Carriers Marketing & Sales Products Priced to Generate Sales Volume Products Priced to Generate Sales Volume Operations Timing of Asset Purchases MARGIN Located in Close Proximity with Suppliers Policy Choice of Plant Tech. Efficient Order Sizes Efficient Order Sizes National Scale Advertising National Scale Advertising Organizational Learning Interrelationships with Sister Units Interrelationships with Sister Units Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Marketing & Sales Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Cost Effective MIS Systems Firm Infrastructure Small, highly trained sales force Human Resource Management Consistent Pol. to Reduce Turnover Costs Support Activities Support Activities Effective Training Programs to Improve Worker Efficiency and Effectiveness Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes MARGIN Easy-to-Use Manufacturing Technologies Technological Development Products priced to generate sales volume Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Efficient Plant Scale to Minim- ize Manufactur- ing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Service Outbound Logistics Marketing & Sales Inbound Logistics Selection of Low Cost Transport Carriers Marketing & Sales Products Priced to Generate Sales Volume Timing of Asset Purchases MARGIN Operations Located in Close Proximity with Suppliers Policy Choice of Plant Tech. Efficient Order Sizes National Scale Advertising Organizational Learning Interrelationships with Sister Units Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Service Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Cost Effective MIS Systems Firm Infrastructure Effective product installations to reduce recalls Support Activities Support Activities Human Resource Management Effective Training Programs to Improve Worker Efficiency and Effectiveness Consistent Pol. to Reduce Turnover Costs MARGIN Easy-to-Use Manufacturing Technologies Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Efficient Plant Scale to Minim- ize Manufactur- ing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Service Effective Product Installations to Reduce Frequency and Severity of Recalls Service Service Inbound Logistics Outbound Logistics Marketing & Sales Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Operations MARGIN Timing of Asset Purchases Located in Close Proximity with Suppliers Policy Choice of Plant Tech. Efficient Order Sizes National Scale Advertising Organizational Learning Interrelationships with Sister Units Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Human Resource Management Technological Development 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 Cost Effective MIS Systems Firm Infrastructure Support Activities Support Activities Human Resource Management Consistent Pol. to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness MARGIN Easy-to-Use Manufacturing Technologies Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Procurement Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Efficient Plant Scale to Minim- ize Manufactur- ing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Service Outbound Logistics Outbound Logistics Procurement Inbound Logistics Operations Operations Inbound Logistics Marketing & Sales Marketing & Sales Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Timing of Asset Purchases MARGIN Systems and procedures to find the lowest cost products to purchase raw materials Frequent evaluation processes to monitor suppliers’ performances Located in Close Proximity with Suppliers Policy Choice of Plant Tech. Efficient Order Sizes National Scale Advertising Organizational Learning Interrelationships with Sister Units Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Technological Development 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 Cost Effective MIS Systems Firm Infrastructure Support Activities Support Activities Human Resource Management Effective Training Programs to Improve Worker Efficiency and Effectiveness Consistent Pol. to Reduce Turnover Costs MARGIN Easy-to-Use Manufacturing Technologies Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Technological Development Technological Development Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Procurement Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Technological Development Efficient Plant Scale to Minim- ize Manufactur- ing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Service Easy-to-Use manufacturing technologies Outbound Logistics Investments in technology in order to reduce costs associated with manufacturing processes Inbound Logistics Operations Selection of Low Cost Transport Carriers Marketing & Sales Products Priced to Generate Sales Volume Timing of Asset Purchases MARGIN Located in Close Proximity with Suppliers Policy Choice of Plant Tech. Efficient Order Sizes National Scale Advertising Organizational Learning Interrelationships with Sister Units Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Human Resource Management 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 Cost Effective MIS Systems Firm Infrastructure Human Resource Management Human Resource Management Support Activities Support Activities Support Activities Human Resource Management Effective Training Programs to Improve Worker Efficiency and Effectiveness Consistent Pol. to Reduce Turnover Costs MARGIN Easy-to-Use Manufacturing Technologies Technological Development Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Human Resource Management Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Consistent policies to reduce turnover costs Intense & effective training programs to improve worker efficiency and effectiveness Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Efficient Plant Scale to Minim- ize Manufactur- ing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Outbound Logistics Inbound Logistics Operations Marketing & Sales Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Timing of Asset Purchases MARGIN Located in Close Proximity with Suppliers Policy Choice of Plant Tech. Efficient Order Sizes National Scale Advertising Organizational Learning Interrelationships with Sister Units Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Cost Effective MIS Systems Firm Infrastructure Firm Infrastructure Support Activities Support Activities Support Activities Human Resource Management Human Resource Management Effective Training Programs to Improve Worker Efficiency and Effectiveness Consistent Pol. to Reduce Turnover Costs MARGIN Firm Infrastructure Easy-to-Use Manufacturing Technologies Technological Development Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Cost effective MIS systems Relatively few managerial layers to reduce overhead costs Simplified planning policies to reduce planning costs Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Highly Efficient Systems to Link Suppliers’ Prod-ucts with the Firm’s Produc-tion Processes Efficient Plant Scale to Minim- ize Manufactur- ing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Outbound Logistics Inbound Logistics Marketing & Sales Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Timing of Asset Purchases MARGIN Operations Located in Close Proximity with Suppliers Policy Choice of Plant Tech. Efficient Order Sizes National Scale Advertising Organizational Learning Interrelationships with Sister Units Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 21

How to Obtain a Cost Advantage 1 Determine and Control Cost Drivers 2 Reconfigure the as needed Value Chain Alter production process Change in automation New raw material New distribution channel New advertising media Direct sales in place of indirect sales Forward integration Backward integration Alter location relative to suppliers or buyers © 2006 by Nelson, a division of Thomson Canada Limited. 36

Cost Leadership Strategy and the Five Forces of Competition Rivalry with Existing Competitors Can use cost leadership strategy to advantage since: competitors avoid price wars with cost leaders, creating higher profits for the entire industry Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition © 2006 by Nelson, a division of Thomson Canada Limited.

Cost Leadership Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Bargaining Power of Buyers (Customers) Can mitigate buyers’ power by: Driving prices far below competitors and cause exit and shift power back to firm. © 2006 by Nelson, a division of Thomson Canada Limited.

Cost Leadership Strategy and the Five Forces of Competition Bargaining Power of Suppliers Can mitigate suppliers’ power by: being able to absorb cost increases due to low cost position being able to make very large purchases, reducing chance of supplier using power Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition © 2006 by Nelson, a division of Thomson Canada Limited.

Cost Leadership Strategy and the Five Forces of Competition Threat of New Entrants Can frighten off new entrants due to: their need to enter on a large scale in order to be cost competitive the time it takes to move down the learning curve Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition © 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Threat of Substitute Products Well positioned relative to substitutes because: brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands. © 2006 by Nelson, a division of Thomson Canada Limited.

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

Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Breadth of Competitive Scope Broad Target Market Narrow Cost Leadership Differentiation © 2006 by Nelson, a division of Thomson Canada Limited. 52

Differentiation strategy “An integrated set of actions designed by a firm to produce or deliver goods or services that customers perceive as being different in ways that are important to them.” © 2006 by Nelson, a division of Thomson Canada Limited.

How to Obtain a Differentiation Advantage Control if needed Reconfigure to maximize Cost Drivers Value Chain Lower buyers’ costs Raise performance of product or service Create sustainability through: - customer perceptions of uniqueness - customer reluctance to switch to non-unique product © 2006 by Nelson, a division of Thomson Canada Limited.

Human Resource Management Technological Development Value Creating Activities common to a Differentiation Business Level Strategy Inbound Logistics Compensation programs intended to encourage worker creativity & prod. Firm Infrastructure A companywide emph-asiis on producing high quality products Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Human Resource Management Highly Developed Information Systems to better understand customers’ purchasing preferences Extensive use of subjective rather than objective performance measures Superior personnel training Support Activities Support Activities MARGIN Coordination among R&D, product development and marketing Technological Development Strong capability in basic research Investments in tech. that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Procurement Purchase of highest quality replacement parts Consistent manufacturing of attractive products Accurate and responsive order processing procedures Strong Coordin-ation among functions in R&D, Marketing and Product Development Complete field stocking of replacement parts Service Inbound Logistics Operations Marketing & Sales Outbound Logistics MARGIN Rapid responses to customers unique manufacturing specifications Extensive personal relationships with buyers Rapid and timely product deliveries to customers Premium Pricing Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 65

Human Resource Management Technological Development Value Creating Activities common to a Differentiation Business Level Strategy Operations Highly Developed Information Systems to better understand customers’ purchasing preferences Consistent manufacturing of attractive products Firm Infrastructure Compensation programs intended to encourage worker creativity & prod. Support Activities Human Resource Management Coordination among R&D, product development and marketing MARGIN Technological Development Strong capability in basic research Rapid responses to customers unique manufacturing specifications Systems and procedures used to find the highest quality raw materials Procurement Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products Accurate and responsive order processing procedures Strong Coordin-ation among functions in R&D, Marketing and Product Development Complete field stocking of replacement parts Service Outbound Logistics Inbound Logistics Operations Marketing & Sales Operations MARGIN Rapid responses to customers unique manufacturing specifications Extensive personal relationships with buyers Rapid and timely product deliveries to customers Premium Pricing Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 65

Human Resource Management Technological Development Value Creating Activities common to a Differentiation Business Level Strategy Outbound Logistics Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emph-asiis on producing high quality products Firm Infrastructure Accurate and responsive order processing procedures Compensation programs intended to encourage worker creativity & prod. Extensive use of subjective rather than objective performance measures Human Resource Management Superior personnel training Support Activities Support Activities Coordination among R&D, product development and marketing Investments in tech. that will allow the firm to consistently produce highly differentiated products MARGIN Technological Development Strong capability in basic research Systems and procedures used to find the highest quality raw materials Procurement Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products Accurate and responsive order processing procedures Strong Coordin-ation among functions in R&D, Marketing and Product Development Complete field stocking of replacement parts Service Outbound Logistics Outbound Logistics Marketing & Sales Inbound Logistics Operations MARGIN Rapid responses to customers unique manufacturing specifications Extensive personal relationships with buyers Rapid and timely product deliveries to customers Premium Pricing Primary Activities © 2006 by Nelson, a division of Thomson Canada Limited. 65

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Can defend against competition because: brand loyalty to differentiated product offsets price competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition © 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Bargaining Power of Buyers Can mitigate buyer power because: well differentiated products reduce customer sensitivity to price increases © 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Bargaining Power of Suppliers Can mitigate suppliers’ power by: absorbing price increases due to higher margins passing along higher supplier prices because buyers are loyal to differentiated brand © 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Threat of New Entrants Can defend against new entrants because: new products must surpass proven products or, new products must be at least equal to performance of proven products, but offered at lower prices © 2006 by Nelson, a division of Thomson Canada Limited.

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Threat of Substitute Products Well positioned relative to substitutes because: brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands © 2006 by Nelson, a division of Thomson Canada Limited.

Major Risks of a Differentiation Business Level Strategy Customers may decide that the differentiation between the differentiator’s product and the cost leaders price is too large. A firm’s means of differentiation may cease to provide value for which customers are willing to pay. The means of uniqueness may no longer be valued by customers. © 2006 by Nelson, a division of Thomson Canada Limited.

Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Breadth of Competitive Scope Broad Target Market Narrow Cost Leadership Differen- tiation Focused Cost Leadership Focused Differen- tiation © 2006 by Nelson, a division of Thomson Canada Limited. 10

© 2006 by Nelson, a division of Thomson Canada Limited. Focus Strategies Focus strategies are an integrated set of actions designed to produce or deliver goods or services that serve the needs of a particular competitive segment. © 2006 by Nelson, a division of Thomson Canada Limited.

Focused Business Level Strategies Business Level Strategies involve the same basic approach as Broad Market Strategies. However... Opportunities may exist because: Firm may lack resources to compete industry wide. Large firms may overlook small niches. The firm may be able to serve a narrow market segment more effectively than industry wide competitors. Focus can allow you to direct resources to certain value chain activities to build competitive advantage. © 2006 by Nelson, a division of Thomson Canada Limited. *

Focused Business Level Strategies Business Level Strategies involve the same basic approach as Broad Market Strategies. Minimize R&D costs by copying innovators * Differentiated features with low cost products - Ikea Good design & function at low prices - Purdy’s Chocolates High quality chocolates © 2006 by Nelson, a division of Thomson Canada Limited. 97

Focused Business Level Strategies Business Level Strategies involve the same basic approach as Broad Market Strategies. * Focused Differentiators may thrive by selecting a small market that is underserved by large players. © 2006 by Nelson, a division of Thomson Canada Limited. * an 99

© 2006 by Nelson, a division of Thomson Canada Limited. Major Risks Involved With a Focused Differentiation Business Level Strategy Firm may be “out focused” by competitors. Large competitor may set its sights on your niche market. Preferences of niche market may change to match those of broad market. © 2006 by Nelson, a division of Thomson Canada Limited.

Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Integrated Low Cost/ Differentiation Breadth of Competitive Scope Broad Target Market Narrow Cost Leadership Differen- tiation Focused Cost Leadership Focused Differen- tiation © 2006 by Nelson, a division of Thomson Canada Limited. 102

Integrated Low Cost/Differentiation Firms using an Integrated Strategy may: Adapt more quickly Learn new skills and technologies Leverage core competencies while competing against it’s rivals May utilize Flexible Manufacturing Systems to create differentiated products at low costs © 2006 by Nelson, a division of Thomson Canada Limited. 103

Flexible Manufacturing Systems Information networks Total Quality Management Systems © 2006 by Nelson, a division of Thomson Canada Limited.

Total Quality Management - TQM Meeting customer expectations while striving to exceed them. Focusing on work activities to drive out waste. Focus on “Continuous Improvement”. Develop the flexibility to spot opportunities to simultaneously increase differentiation and /or drive out costs. © 2006 by Nelson, a division of Thomson Canada Limited.