1. Ch4-1 Chapter 4 Business-Level Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing

2. Ch4-2 Chapter 3 Internal Environment Chapter 2 External Environment The Strategic ManagementProcess ManagementProcess Strategic Intent Strategic Mission Strategic Competitiveness Above Average Returns Feedback Strategy Formulation Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 6 Corporate-Level Strategy Chapter 8 International Strategy Chapter 9 Cooperative Strategies Chapter 7 Acquisitions & Restructuring Strategy Implementation Chapter 10 Corporate Governance Chapter 11 Structure & Control Chapter 12 Strategic Leadership Chapter 13 Entrepreneurship & Innovation Entrepreneurship & Innovation Strategic Inputs Strategic Actions Strategic Outcomes

3. Ch4-3 Chapter 4 Business Level Strategy SustainableCompetitiveAdvantage Chapter 2 External Environment Chapter 3 Internal Environment

4. Ch4-4 Core Competenc y Core The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

5. Ch4-5 Strateg y An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

6. Ch4-6 Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Business Level Strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

7. Ch4-7 Basis for Customer Segmentation Consumer Markets 1. Demographic factors (age, income, sex, etc.) 2. Socioeconomic factors (social class, stage in the family life cycle) 3.Geographic factors (culture, region or country differences) 4.Psychological factors (lifestyle, personality traits) 5.Consumption patterns (heavy, moderate, and light users) 6.Perceptual factors (benefit segmentation, perceptual mapping) 7.Brand loyalty patterns

8. Ch4-8 Basis for Customer Segmentation Industrial Markets 1. End use segments (identified by SIC code) 2. Product segments (based on technological differences or production economics) 3.Geographic segments (defined by boundaries between countries or by regional differences within them) 4. Common buying factor segments (cut across product/market and geographic segments) 5. Customer size segments

9. Ch4-9 Generic Business Level Strategies CostUniqueness Source of Competitive Advantage Breadth of Competitive Scope BroadTargetMarket NarrowTargetMarket Focused Differen- tiation Focused Differen- tiation Cost Leadership Cost Leadership Differen- tiation Differen- tiation Focused Low Cost CostLeadership

10. Ch4-10 Key Criteria: Cost Leadership Business Level Strategy Relatively standardized products Features acceptable to many customers Lowest competitive price

11. Ch4-11 Requirements: Constant effort to reduce costs through: Building efficient scale facilities State of the art manufacturing facilities Simplification of processes Minimizing costs of sales, R&D and service Monitoring costs of activities provided by outsiders Tight control of production costs and overhead Cost Leadership Business Level Strategy

12. Ch4-12 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy

13. Ch4-13 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy

14. Ch4-14 Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Inbound Logistics Inbound Logistics Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Located in Close Proximity with Suppliers

15. Ch4-15 Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Operations Efficient Plant Scale to Minimize Mfg. Costs Timing of Asset Purchases Policy Choice of Plant Technology Organizational Learning

16. Ch4-16 Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Outbound Logistics Outbound Logistics Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs Efficient Order Sizes Interrelationships with Sister Units

17. Ch4-17 Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Marketing & Sales National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Marketing & Sales

18. Ch4-18 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Service Effective Product Installations to Reduce Recalls Effective Product Installations to Reduce Recalls Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy

19. Ch4-19 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Procurement Systems and Procedures to Find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Procurement Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy

20. Ch4-20 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Technological Development Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy

21. Ch4-21 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Human Resource Management Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy

22. Ch4-22 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Firm Infrastructure Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy

23. Ch4-23 How to Obtain a Cost Advantage 1. Determine and Control Cost Drivers 2. Reconfigure the Value Chain as needed Alter production process Change in automation New distribution channel Direct sales in place of indirect sales New advertising media New raw material Backward integration Forward integration Change location relative to suppliers or buyers

24. Ch4-24 Reconfiguring the Value Chain of Iowa Beef Packers (IBP) Reconfiguring the Value Chain of Iowa Beef Packers (IBP) Ranch Cattle Ship “on the Hoof” to Rail Center (Chicago) Slaughter into sides of beef “Boxed Cuts” at Markets Old Way: Old Way: Save on shipping and cattle weight loss Utilize cheaper non-union rural labor New Way New Way: New Way: Locate large automated plants near ranches Process into “Boxed Cuts” at plants Ship cuts already “Boxed” to Markets

25. Ch4-25 Choices That Drive Costs Economies of scale Asset utilization Capacity utilization pattern Value chain linkages Interrelationships - Advertising & Sales - Logistics & Operations - Seasonal, cyclical - Order processing and distribution and distribution Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Hiring, training, motivation

26. Ch4-26 Three Key Questions 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs? Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors 1. How can an activity be performed differently or even eliminated?

27. Ch4-27 Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive

28. Ch4-28 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” * * Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants

29. Ch4-29 Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Bargaining Power of Buyers Threat of New Entrants Can mitigate Buyer Power by: * * Driving prices far below competitors may cause exit and shift power back to firm Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive

30. Ch4-30 Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Can mitigate Buyer Power by: Threat of New Entrants Bargaining Power of Buyers Driving prices far below competitors which may cause exit and shift power back to firm Well positioned relative to Substitutes in order to: Make investments to create substitutes first ** Buy patents developed by potential substitutes ** Lower prices to maintain value position ** Threat of Substitute Products Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive

31. Ch4-31 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” * Well positioned relative to Substitutes in order to: Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position * Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Can mitigate Buyer Power by: Bargaining Power of Buyers Driving prices far below competitors which may cause exit and shift power back to firm Can mitigate Supplier Power by: Low cost position makes them better able to absorb cost increases * * More likely to make very large purchases which reduces chance of supplier power * * Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive

32. Ch4-32 Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Threat of Substitute Products 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” * Well positioned relative to Substitutes in order to: Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position * Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry Rivalry Among Competing Firms in Industry Can mitigate Buyer Power by: Bargaining Power of Buyers Driving prices far below competitors which may cause exit and shift power back to firm Can mitigate Supplier Power by: Low cost position makes them better able to absorb cost increases * More likely to make very large purchases which reduces chance of supplier power *

33. Ch4-33 Major Risks of Cost Leadership Business Level Strategy 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

34. Ch4-34 Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Leadership Cost Leadership Uniqueness Generic Business Level Strategies

35. Ch4-35 Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Leadership Cost Leadership Differen- tiation Differen- tiation Generic Business Level Strategies Uniqueness

36. Ch4-36 Key Criteria: Differentiation Business Level Strategy Value provided by unique features and value characteristics Command premium price Superior quality Rapid innovation Prestige or exclusivity High customer service

37. Ch4-37 Differentiation Business Level Strategy Requirements: Constant effort to differentiate products through: Developing new systems and processes Quality focus Maximize Human Resource contributions through low turnover and high motivation Capability in R&D Shaping perceptions through advertising

38. Ch4-38 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Value Creating Activities Common to a Differentiation Business Level Strategy

39. Ch4-39 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Primary Activities Support Activities Value Creating Activities Common to a Differentiation Business Level Strategy

40. Ch4-40 Value Creating Activities Common to a Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Inbound Logistics Inbound Logistics Superior handling of incoming raw materials to minimize damage and improve the quality of the final product

41. Ch4-41 Value Creating Activities Common to a Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Operations Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products

42. Ch4-42 Value Creating Activities Common to a Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Outbound Logistics Outbound Logistics Accurate and responsive order processing procedures Rapid and timely product deliveries to customers

43. Ch4-43 Value Creating Activities Common to a Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Marketing & Sales Extensive personal relationships with buyers Strong Coordination among functions in R&D, Marketing and Product Development Premium Pricing

44. Ch4-44 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Service Complete field stocking of replacement parts Value Creating Activities Common to a Differentiation Business Level Strategy

45. Ch4-45 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Procurement Located in Close Proximity with Suppliers Located in Close Proximity with Suppliers Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Value Creating Activities Common to a Differentiation Business Level Strategy

46. Ch4-46 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Technological Development Strong capability in basic research Investments in technol- ogies to produce highly differentiated products Coordination among R&D, marketing and product development Coordination among R&D, marketing and product development Value Creating Activities Common to a Differentiation Business Level Strategy

47. Ch4-47 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Human Resource Management Compensation programs which encourage worker creativity and productivity Extensive use of subjective performance measures Superior personnel training Value Creating Activities Common to a Differentiation Business Level Strategy

48. Ch4-48 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Firm Infrastructure A companywide emphasis on producing high quality products Highly developed Information Systems to better understand customers’ purchasing preferences Value Creating Activities Common to a Differentiation Business Level Strategy

49. Ch4-49 Differentiation Value Chain activities Effectiveness with Differentiation grows out of Value Chain activities Examples: Heineken beer Raw materials Caterpillar tractors Service buyers’ needs quickly anywhere in the world Intel microprocessors Technological superiority Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship Differentiation Business Level Strategy

50. Ch4-50 Creating barriers by perceptions of uniqueness Creating switching costs through differentiation Raising Buyers’ Performance Lowering Buyers’ Costs Creating Sustainability through: Create Value with Differentiation by:

51. Ch4-51 Drivers of Differentiation Unique product features Unique product performance Exceptional services Quality of inputs New technologies Exceptional skill or experience Detailed information Examples:

52. Ch4-52 Effective Differentiators can remain profitable even when the Five Forces appear unattractive Effective Differentiators can remain profitable even when the Five Forces appear unattractive

53. Ch4-53 Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices *

54. Ch4-54 Can mitigate Buyer Power because: Well differentiated products reduce customer sensitivity to price increases Bargaining Power of Buyers Threat of New Entrants Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Effective Differentiators can remain profitable even when the Five Forces appear unattractive

55. Ch4-55 Threat of New Entrants Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Bargaining Power of Suppliers Well positioned relative to Substitutes because: Brand loyalty tends to reduce new product trial and brand switching * * Threat of Substitute Products Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Effective Differentiators can remain profitable even when the Five Forces appear unattractive

56. Ch4-56 Bargaining Power of Suppliers Threat of New Entrants Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of Substitute Products Well positioned relative to Substitutes because: Brand loyalty tends to reduce new product trial and brand switching * Can mitigate Supplier Power by: Absorbing price increases due to higher margins * * Passing on higher supplier prices because buyers are brand loyal * *

57. Ch4-57 Rivalry Among Competing Firms in Industry Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Well positioned relative to Substitutes because: Brand loyalty tends to reduce new product trial and brand switching * Can mitigate Supplier Power by: * * Absorbing price increases due to higher margins Passing on higher supplier prices because buyers are brand loyal Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases 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

58. Ch4-58 Customers may decide that the cost of “uniqueness” is too great The means of uniqueness may no longer be valued by customers Competitors may learn how to imitate Value Chain Major Risks of a Differentiation Business Level Strategy Major Risks of a Differentiation Business Level Strategy

59. Ch4-59 Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Leadership Cost Leadership Differen- tiation Differen- tiation Uniqueness Generic Business Level Strategies

60. Ch4-60 Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Leadership Cost Leadership Differen- tiation Differen- tiation Focused Differen- tiation Focused Differen- tiation Focused Low Cost Uniqueness Generic Business Level Strategies

61. Ch4-61 Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: Focused Business Level Strategies Large firms may overlook small niches Firm may lack resources to compete industry-wide May be able to serve a narrow market segment more effectively than industrywide competitors Focus can allow you to direct resources to certain value chain activities to build competitive advantage

62. Ch4-62 Bang & Olufsen Upscale electronic components Iams Company Premium pet foods Snap-on tools High quality mechanics’ tools Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: Examples: May be able to retrofit old factories to keep costs down Minimize R&D costs by copying innovators

63. Ch4-63 Custom manufacturers of parts for Harley-Davidson motorcycles Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: Example: Focused Differentiators may thrive by selecting a small market that is underserved by large players

64. Ch4-64 Firm may be “outfocused” by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market Major Risks Involved With a Focused Differentiation Business Level Strategy Major Risks Involved With a Focused Differentiation Business Level Strategy

65. Ch4-65 Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Leadership Cost Leadership Differen- tiation Differen- tiation Generic Business Level Strategies Focused Differen- tiation Focused Differen- tiation Focused Low Cost Integrated Low Cost/ Differentiation Integrated Low Cost/ Differentiation Uniqueness

66. Ch4-66 Firms using an Integrated Strategy may: Integrated Low Cost/Differentiation Strategy Utilize Flexible Manufacturing Systems to create differentiated products at low costs Adapt more quickly Learn new skills and technologies Leverage core competencies through Information Networks across multiple business units Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs

67. Ch4-67 Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise The risk is that the firm may become lacking a strong commitment to or expertise with either type of generic strategy 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 Integrated Low Cost/Differentiation Strategy

68. Ch4-68 Southwest Airlines Integrated Low Cost/Differentiation Strategy Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes 15 minute turnaround time No meals No reserved seats No travel agent reservations Low Cost Focus on customer satisfaction New flight services for business travelers (phones and faxes) New flight services for business travelers (phones and faxes) High level of employee dedication Differentiation