Transparency 4-1 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 Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

Transparency 4-2 Breadth of Competitive Scope Source of Competitive Advantage BroadTargetMarket NarrowTargetMarket Cost Focused Differen- tiation Focused Differen- tiation Cost Leadership Cost Leadership Differen- tiation Differen- tiation Focused Low Cost Generic Business Level Strategies Uniqueness

Transparency 4-3 Relatively standardized products Features acceptable to many customers Lowest competitive price 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

Transparency 4-4 Primary Activities Support Activitie s 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 PurchasRaw 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

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

Transparency 4-6 Example of Reconfiguring the Value Chain Ranch Cattle Ship “on the Hoof” to Rail Center (Chicago) Slaughter into sides of beef “Boxed Cuts” at Markets Old Way: Old Way: Iowa Beef Packers 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

Transparency 4-7 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 * 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 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 *

Transparency 4-8 Differentiation Business Level Strategy Requirements Constant effort to differ- entiate 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 Value provided by unique features and value characteristics Command premium price Superior quality Rapid innovation Prestige or exclusivity High customer service

Transparency 4-9 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 common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy Primary Activities Support Activitie s

Transparency 4-10 Creating barriers by perceptions of uniqueness Creating switching costs through differentiation Raising Buyers’ Performance 1 1 Lowering Buyers’ Costs 3 3 Sustainability is created through: 2 2 Create Value with Differentiation by:

Transparency 4-11 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 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 Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases

Transparency 4-12 Focus can allow you to direct resources to certain value chain activities to build competitive advantage May be able to serve a narrow market segment more effectively than industrywide competitors Firm may lack resources to compete industrywide Large firms may overlook small niches However..... Opportunities may exist because: * * * * * * * * Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies

Transparency 4-13 Breadth of Competitive Scope Source of Competitive Advantage BroadTargetMarket NarrowTargetMarket Cost 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

Transparency 4-14 May utilize Flexible Manufacturing Systems to create differentiated products at low costs Firms using an Integrated Strategy may: Adapt more quickly Learn new skills and technologies Leverage core competencies through Information Networks across multiple business units Integrated Low Cost/Differentiation Strategy May utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs

Transparency 4-15 Integrated Low Cost/Differentiation Strategy Differentiation Low Cost Use a single aircraft model (Boeing 737) 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 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 Southwest Airlines