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

Breadth of Competitive Scope Source of Competitive Advantage BroadTargetMarket NarrowTargetMarket Cost Cost Leadership Cost Leadership Generic Business Level Strategies Uniqueness

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

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

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

Profit = (P – C) × Q

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. Cost per unit of output Cumulative Output

Examples of Experience Curves 100K200K 500K 1,000K Accumulated unit production Accumulated units (millions) 1960 Yen 15K 20K 30K Price Index % slope 75% Japanese clocks & watches, UK refrigerators,

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

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

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 Inbound Logistics Inbound Logistics Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Located in Close Proximity with Suppliers

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 Service MARGIN Relatively Few Management Layers to Reduce Overhead Effective Training Programs to Improve Worker Efficiency and Effectiveness Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Frequent Evaluation Processes to Monitor Suppliers’ Performances Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Operations Efficient Plant Scale to Minimize Mfg. Costs Timing of Asset Purchases Policy Choice of Plant Technology Organizational Learning

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 Outbound Logistics Marketing & Sales Service MARGIN 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 Frequent Evaluation Processes to Monitor Suppliers’ Performances 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

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 Marketing & Sales National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Marketing & Sales

Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Service Effective Product Installations to Reduce Recalls Recalls 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 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

Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN 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

Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN 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

Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN 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

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

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” * *

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

Threat of Substitute Products 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 * * Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Buyers

Bargaining Power of Suppliers Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Threat of Substitute Products Bargaining Power of Buyers 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 * *

Threat of New Entrants Bargaining Power of Suppliers Threat of Substitute Products 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 Rivalry Among Competing Firms in Industry Bargaining Power of Buyers

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