Business-Level Strategy: How do we compete? 1

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Broad Target Market Breadth of Competitive Scope Narrow Target Market 11

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Broad Target Market Differentiation Breadth of Competitive Scope Narrow Target Market 53

Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Broad Target Market Differentiation Breadth of Competitive Scope Focused Differentiation Focused Low Cost Narrow Target Market 89

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Integrated Low Cost/ Differentiation Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market 102

Profit = (P – C) × Q

The “Law of Experience” The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. 1994 1995 Cost per unit of output 1996 1997 1998 1999 2000 Cumulative Output 10

Examples of Experience Curves Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71 15K 20K 30K 1960 Yen 50 100 200 300 Price Index 75% 70% slope 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units (millions) (millions) 11

Choices that Drive Costs Economies of scale Product features Asset utilization Performance Capacity utilization pattern Mix & variety of products - Seasonal, cyclical Service levels Interrelationships Small vs. large buyers - Order processing and distribution Process technology Value chain linkages Wage levels - Advertising & Sales Product features - Logistics & Operations Hiring, training, motivation 41

Value Chain of Firm Activities Firm Infrastructure Human Resource Management MARGIN Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN 21

Value Creating Activities common to a Cost Leadership Business Level Strategy Inbound Logistics Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Support Activities Located in Close Proximity with Suppliers Inbound Logistics Primary Activities 23

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Operations Efficient Plant Scale to Minimize Mfg. Costs Timing of Asset Purchases Policy Choice of Plant Technology Organizational Learning Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Human Resource Management Effective Training Programs to Improve Worker Efficiency and Effectiveness Support Activities MARGIN Technological Development Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Efficient Plant Scale to Minimize Manufacturing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Service Inbound Logistics Outbound Logistics Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Operations Operations Timing of Asset Purchases MARGIN Policy Choice of Plant Technology Efficient Order Sizes Organizational Learning Primary Activities 24

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Outbound Logistics Firm Infrastructure Delivery Schedule that Reduces Costs Human Resource Management Support Activities Selection of Low Cost Transport Carriers MARGIN Technological Development Efficient Order Sizes Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Interrelationships with Sister Units Effective Product Installations to Reduce Frequency and Severity of Recalls Service Outbound Logistics Outbound Logistics Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Marketing & Sales MARGIN Efficient Order Sizes National Scale Advertising Interrelationships with Sister Units Primary Activities 25

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Marketing & Sales Firm Infrastructure Small, Highly Trained Sales Force Human Resource Management Support Activities Products Priced to Generate Sales Volume MARGIN Technological Development Procurement National Scale Advertising Service Inbound Logistics Outbound Logistics Marketing & Sales Marketing & Sales Operations MARGIN Primary Activities 26

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Service Firm Infrastructure Effective Product Installations to Reduce Recalls Human Resource Management Support Activities MARGIN Technological Development Procurement Service Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Primary Activities 27

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 Procurement Service Inbound Logistics Procurement Outbound Logistics Marketing & Sales Operations MARGIN Systems and Procedures to Find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Primary Activities 28

Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Technological Development Procurement Technological Development Service Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Primary Activities 29

Human Resource Management Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Human Resource Management Human Resource Management Support Activities MARGIN Technological Development Human Resource Management Procurement Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Primary Activities 30

Human Resource Management Technological Development Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Firm Infrastructure Cost Effective MIS Systems Simplified Planning Practices to Reduce Planning Costs Relatively Few Management Layers to Reduce Overhead Procurement Service Outbound Logistics Marketing & Sales Inbound Logistics Operations MARGIN Primary Activities 31

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products 50

Can frighten off New Entrants due to the need to: 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” 46

Bargaining Power of Buyers Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can mitigate Buyer Power by: Bargaining Power of Buyers * Driving prices far below competitors may cause exit and shift power back to firm 47

Threat of Substitute Products Bargaining Power of Buyers Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Threat of Substitute Products Well positioned relative to Substitutes in order to: Bargaining Power of Buyers * Make investments to create substitutes first * Buy patents developed by potential substitutes Lower prices to maintain value position * 48

Bargaining Power of Buyers Threat of Substitute Products Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Can mitigate Supplier Power by: Bargaining Power of Buyers Low cost position makes them better able to absorb cost increases * More likely to make very large purchases which reduces chance of supplier power * Threat of Substitute Products 49

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products 50

Dramatic technological change could take away your cost advantage The Major Risks involved with a Cost Leadership Business Level Strategy Competitors may learn how to imitate Value Chain Focus on efficiency could cause Cost Leader to overlook changes in customer preferences 51

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Narrow Target Market 53

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 59

Drivers of Differentiation Some Examples: Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information 80

Human Resource Management Technological Development Value Creating Activities common to a Differentiation Business Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations MARGIN Primary Activities 65

Technological Development Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Inbound Logistics Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Service MARGIN Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Support Activities Inbound Logistics Primary Activities 67

Technological Development Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Operations Consistent manufacturing of attractive products Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Service MARGIN Support Activities Rapid responses to customers unique manufacturing specifications Operations Primary Activities 68

Technological Development Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Outbound Logistics Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Marketing & Sales Service MARGIN Accurate and responsive order processing procedures Support Activities Rapid and timely product deliveries to customers Outbound Logistics Primary Activities 69

Technological Development Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Marketing & Sales Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Marketing & Sales Service MARGIN Strong Coordination among functions in R&D, Marketing and Product Development Support Activities Extensive personal relationships with buyers Premium Pricing Marketing & Sales Primary Activities 70

Technological Development Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Service Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Marketing & Sales Service MARGIN Complete field stocking of replacement parts Support Activities Service Primary Activities 71

Technological Development Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Marketing & Sales Service MARGIN Support Activities Procurement Procurement Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Located in Close Proximity with Suppliers Primary Activities 72

Technological Development Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Marketing & Sales Service MARGIN Support Activities Technological Development Technological Development Coordination among R&D, marketing and product development Investments in technol-ogies to produce highly differentiated products Strong capability in basic research Primary Activities 73

Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Marketing & Sales Service MARGIN Human Resource Management Support Activities Human Resource Management Compensation programs which encourage worker creativity and productivity Extensive use of subjective performance measures Superior personnel training Primary Activities 74

Technological Development Human Resource Management Value Creating Activities common to a Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Marketing & Sales Service MARGIN Firm Infrastructure Support Activities Firm Infrastructure Highly developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Primary Activities 75

Effectiveness with Differentiation grows out of Value Chain activities Differentiation Business Level Strategy Effectiveness with Differentiation grows out of Value Chain activities Examples: Heineken beer Raw materials – brand name Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship Intel microprocessors Technological superiority Service buyers’ needs quickly anywhere in the world Caterpillar tractors 76

Can fend off New Entrants because: Effective Differentiators can remain profitable even when the Five Forces appear unattractive Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can fend off New Entrants because: * New products must surpass proven products * Or be equal to performance at lower prices 82

Can mitigate Buyer Power because: Effective Differentiators can remain profitable even when the Five Forces appear unattractive Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can mitigate Buyer Power because: Bargaining Power of Buyers Well differentiated products reduce customer sensitivity to price increases 83

Threat of Substitute Products Bargaining Power of Suppliers Effective Differentiators can remain profitable even when the Five Forces appear unattractive Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Threat of Substitute Products Well positioned relative to Substitutes because: Bargaining Power of Suppliers * Brand loyalty tends to reduce new product trial and brand switching 84

Bargaining Power of Suppliers Threat of Substitute Products Effective Differentiators can remain profitable even when the Five Forces appear unattractive Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Suppliers Can mitigate Supplier Power by: Absorbing price increases due to higher margins * Passing on higher supplier prices because buyers are brand loyal Well positioned relative to Substitutes because: Brand loyalty tends to reduce new product trial and brand switching * Threat of Substitute Products 85

Brand loyalty overcomes much price competition Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices Brand loyalty overcomes much price competition Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products 86

Customers may decide that the cost of “uniqueness” is too great The Major Risks involved with a Differentiation Business Level Strategy Competitors may learn how to imitate Value Chain The means of uniqueness may no longer be valued by customers 87

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market 89

* * * Focused Business Level Strategies 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 industry-wide competitors 93

* * Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies * May be able to retrofit old factories to keep costs down * Minimize R&D costs by copying innovators - Bang & Olufsen Upscale electronic components - Snap-On tools High quality mechanics’ tools - IAMS Premium pet foods 97

* Focused Business Level Strategies Harley-Davidson Focused 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 Custom manufacturers of parts for Harley-Davidson motorcycles 99

Firm may be “outfocused” by competitors The Major Risks involved with a Focused Differentiation Business Level Strategy Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market 100

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Integrated Low Cost/ Differentiation Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market 102

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 104

Southwest Airlines Integrated Low Cost/Differentiation Strategy Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes No meals 15 minute turnaround time No reserved seats No travel agent reservations 106

Southwest Airlines Integrated Low Cost/Differentiation Strategy Use a single aircraft model (Boeing 737) Focus on customer satisfaction Use secondary airports High level of employee dedication Fly short routes No meals New flight services for business travelers (Phones and faxes) 15 minute turnaround time No reserved seats No travel agent reservations 107

What is the Strategy? Friendly Robotics