Business-Level Strategy: How do we compete?

1. Business-Level Strategy: How do we compete?

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

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

4. 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

5. Generic Business Level Strategies 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

6. Profit = (P – C) × Q

7. 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

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

9. 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

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

11. 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

12. Efficient Plant Scale to Minimize Mfg. Costs Timing of Asset Purchases Value Creating Activities common to a Cost Leadership Business Level Strategy Policy Choice of Plant Technology Organizational Learning Operations Relatively Few Management Layers to Reduce Overhead Firm Infrastructure Effective Training Programs to Improve Worker Efficiency and Effectiveness Human Resource Management Support Activities MARGIN Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Technological Development 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 Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Outbound Logistics Timing of Asset Purchases Operations Operations MARGIN Policy Choice of Plant Technology Efficient Order Sizes Organizational Learning Primary Activities

13. 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 Interrelationships with Sister Units Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Outbound Logistics Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Outbound Logistics Marketing & Sales MARGIN Efficient Order Sizes National Scale Advertising Interrelationships with Sister Units Primary Activities

14. 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 Outbound Logistics Marketing & Sales Marketing & Sales Inbound Logistics Operations MARGIN Primary Activities

15. 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

16. Value Creating Activities common to a Cost Leadership Business Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Procurement Service Procurement Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Frequent Evaluation Processes to Monitor Suppliers’ Performances Systems and Procedures to Find the Lowest Cost Products to Purchase Raw Materials Primary Activities

17. 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 Outbound Logistics Inbound Logistics Marketing & Sales Operations MARGIN Primary Activities

18. 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 Outbound Logistics Inbound Logistics Marketing & Sales Operations MARGIN Primary Activities

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

20. 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

21. 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”

22. 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 *

23. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Threat of Substitute Products Well positioned relative toSubstitutes 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 *

24. 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

25. 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

26. 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