Business-Level Strategy:
How do we compete?
Generic Business Level Strategies
Source of Competitive Advantage
Cost Uniqueness
Broad Cost
Target
Market Leadership
Breadth of
Competitive
Scope
Narrow
Target
Market
Generic Business Level Strategies
Source of Competitive Advantage
Cost Uniqueness
Broad Cost
Target Leadership Differentiation
Market
Breadth of
Competitive
Scope
Narrow
Target
Market
Generic Business Level Strategies
Source of Competitive Advantage
Cost Uniqueness
Broad Cost
Target Leadership Differentiation
Market
Breadth of
Competitive
Scope
Focused Low Focused
Narrow
Target Cost Differentiation
Market
Generic Business Level Strategies
Source of Competitive Advantage
Cost Uniqueness
Broad Cost Differen-
Target
Market Leadership tiation
Breadth of Integrated
Competitive Low Cost/
Scope Differentiation
Narrow Focused Focused
Target Differen-
Market Low Cost
tiation
Profit = (P – C) × Q
The Experience Curve
The “Law of Experience”
1994
The unit cost value added to a standard
product declines by a constant %
1995 (typically 20-30%) each time cumulative
output doubles.
Cost per
unit of
1996
output
1997
1998
1999 2000
Cumulative Output
Examples of Experience Curves
Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
50 100 200 300
20K 30K
Price Index
1960 Yen
75%
15K
70% slope
100K 200K 500K 1,000K 5 10 50
Accumulated unit production Accumulated units
(millions) (millions)
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 Process technology
and distribution
Value chain linkages Wage levels
- Advertising & Sales Product features
- Logistics & Operations Hiring, training, motivation
Value Chain of Firm Activities
Firm Infrastructure
Human Resource Management
Technological Development
Procurement
Service
Operations
Marketing
Outbound
Logistics
Logistics
Inbound
& Sales
Value Creating Activities common to a
Inbound Level Strategy
Cost Leadership Business
Logistics
Highly Efficient
Systems to Link
Activities
Support
Suppliers’
Products with the
Firm’s Production
Processes
Located in Close
Proximity with
Suppliers
Logistics
Inbound
Primary Activities
Value Creating Activities common to a
Operations
Cost Leadership Business Level Strategy
Efficient Plant
Relatively Few
Firm Scale
Infrastructure to Minimize
Management Layers to
Reduce Overhead
Mfg. Costs
Activities
Support
Effective Training Programs
Human Resource Management
Timing of Asset
to Improve Worker
Efficiency and Effectiveness
Purchases
Investments in Technology in order
Technological Development to Reduce Costs Associated with
Manufacturing Processes
Policy Choice of
Procurement Plant Technology
Frequent Evaluation Processes to
Monitor Suppliers’ Performances
Efficient Plant Delivery Schedule
Organizational
Small, Highly
Service
Scale to Minimize that Reduces Learning
Trained Sales
Operations
Manufacturing
Outbound
Costs Force
Logistics
Inbound
Costs
Logistics
Selection of Low Products Priced to
Timing of Asset Cost Transport Generate Sales
Purchases Carriers Volume
Policy Choice of Efficient Order
Plant Technology Sizes
Organizational
Learning
Primary Activities
Value Creating Activities common to a
Outbound
Cost Leadership Business Level Strategy
Logistics
Firm Infrastructure Delivery Schedule
that Reduces Costs
Activities
Support
Human Resource ManagementSelection of Low
Cost Transport
Technological Development Carriers
Efficient Order
Procurement
Frequent Evaluation Processes to
Monitor Suppliers’ Performances
Sizes
Delivery Schedule Small, Highly Effective Product
Interrelationships
Service
that Reduces
Outbound
Outbound Trained Sales Installations to
with Sister Units
Marketing
Costs Force Reduce Frequency
Logistics
& Sales
Logistics
Selection of Low
and Severity
Products Priced to of Recalls
Cost Transport Generate Sales
Carriers Volume
Efficient Order National Scale
Sizes Advertising
Interrelationships
with Sister Units
Primary Activities
Value Creating Activities common to a
Marketing
Cost Leadership Business Level Strategy
& Sales
Firm Infrastructure Small, Highly
Trained Sales Force
Activities
Support
Human Resource Management Products Priced
to Generate Sales
Technological Development Volume
Procurement National Scale
Advertising
Service
Operations
Outbound
Marketing
Marketing
Logistics
& Sales
Inbound
Logistics
& Sales
Primary Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Service
Effective Product
Activities
Support
Installations to
Human Resource Management
Reduce
Recalls
Technological Development
Procurement
Service
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
Primary Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Activities
Support
Human Resource Management
Technological Development
Procurement
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
Procurement
Systems and Procedures to Find Frequent Evaluation
the Lowest Cost Products to Processes to Monitor
Purchase Raw Materials Suppliers’ Performances
Primary Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Activities
Support
Human Resource Management
Technological Development
Procurement
Service
Technological Development
Operations
Outbound
Marketing
Logistics
Inbound
Logistics
& Sales
Easy-to-Use Investments in Technology in
Manufacturing order to Reduce Costs Associated
Technologies with Manufacturing Processes
Primary Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Activities
Support
Human Resource Management
Technological Development
Resource Management
Human Procurement
Consistent Policies to Effective Training Programs
Service
Operations
Reduce Turnover Costs to Improve Worker
Outbound
Marketing
Logistics
Inbound
Logistics
Efficiency and Effectiveness
& Sales
Primary Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Firm Infrastructure
Activities
Support
Human Resource Management
Firm Infrastructure
Technological Development
Cost Effective Simplified Planning Relatively Few
MIS Systems Procurement
Practices to Reduce Management Layers
Planning Costs to Reduce Overhead
Service
Operations
Marketing
Outbound
Logistics
& Sales
Inbound
Logistics
Primary Activities
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Bargaining Rivalry Among Bargaining
Power of Competing Firms Power of
Suppliers in Industry Buyers
Threat of
Substitute
Products
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of Can frighten off New Entrants
New
due to the need to:
Entrants
* 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
Can mitigate Buyer Power by: Bargaining
Power of
* Driving prices far below competitors Buyers
may cause exit and shift power back
to firm
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
Threat of New
Substitute Entrants
Products
Well positioned relative to Bargaining
Substitutes in order to: Power of
Buyers
* 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
Bargaining New
Power of Entrants
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
Threat of
of supplier power
which reduces chance Substitute
Products
Effective Cost Leaders can remain profitable
Competitors avoid
even when the Five Forces appear unattractive Cost
price wars with
Leaders, which
Threat of creates higher profits
New
Entrants for entire industry
Bargaining Rivalry Among Bargaining
Power of Competing Firms Power of
Suppliers in Industry Buyers
Threat of
Substitute
Products
Dramatic technological
change could take away
your cost advantage
The Major
Risks involved
with a Competitors may learn
Cost Leadership how to imitate Value Chain
Business Level
Strategy
Focus on efficiency could cause
Cost Leader to overlook changes
in customer preferences