STARTEGIC

MANAGEMENT-I
SESSION 12: BUSINESS LEVEL STRATEGY
COST & DIFFERENTIATION ADVANTAGES

Rupanwita Dash
Assistant Professor, Strategic Management Area
Indian Institute of Management Lucknow
Where are we?

Business/
External Internal Corporate
Introduction Competitive
Analysis Analysis Strategies
Strategies

Identifying Competitive
What is Strategy? Industry structure Diversification
Resources Positioning
Mission, Vision analysis
Cost-leadership

Value
chain
Differentiation Samsung
Intro to International
PESTEL
forces

Competitive
Five

Appraising strategies
Advantage Competitive
Resources
Dynamics
proposit
Delivery

Value

VRIN
ion &
Competitive advantage

Cost advantage
Similar product at lower cost

Competitive
advantage Differentiation
advantage
Price premium for unique product
Porter’s GENERIC STRATEGIES
SOURCE OF COMPETITIVE ADVANTAGE
LOW COST POSITION SUPERIOR PERCIVED VALUE BY
CUSTOMERS
BROAD
COMPETITIVE SCOPE

TARGET
COST LEADERSHIP DIFFERENTIATION
1. Stuck-in-the-middle
NARROW 2. Dual advantage
TARGET
DIFFERENTIATION
COST FOCUS
FOCUS
Features of two Generic Strategies
Generic Key strategy elements Resource & Organizational
Strategy requirements
Cost leadership • Scale-efficient plants • Access to capital
• Design for manufacture • Process engineering skills
• Control of overheads and R&D • Frequent reports
• Process innovation • Tight cost control
• Outsourcing • Specialization of jobs and functions
• Avoidance of marginal customer • Incentive linked to quantitative
accounts targets

Differentiation • Emphasis on branding, advertising, • Marketing abilities

design, service, quality, and new • Product engineering skills
product development • Creativity
• Research capability
• Incentive linked to qualitative targets
Drivers of Cost & Differentiation Advantages

Cost drivers Differentiation drivers

1. Economies of scale A. Uniqueness

2. Economies of learning 1. Product features and performance
3. Production techniques 2. Complementary services (credit,
4. Product design delivery, repair)
5. Input costs 3. Marketing activities
6. Capacity utilization 4. Quality of inputs
7. Residual efficiency 5. Degree of vertical integration
6. Skills and experience of employees
7. Location
B. Brand
Drivers of cost Advantage

1. Economies of scale
• Technical input-output relationships
• Indivisibilities
• Specialization
2. Economies of learning
• Cost reduction with increase in cumulative output
• Increased individual skills
• Improved organizational routines
3. Production techniques
• Process innovation
• Business process reengineering
4. Product design
• Standardization of designs and components
• Design-for-manufacture
• Auto platforms, IBMs Proprinter
Drivers of cost Advantage

5. Input costs
• Locational differences in input price
• software engineers in India, electronics assemblers in China
• Ownership of low-cost supply
• Saudi Aramco vs Exxon Mobil
• Labor unions
• Jet Blue vs United Airlines
• Bargaining power
• Wal-Mart (If bought-in products are major cost item)

6. Capacity utilization
7. Residual efficiency
Differentiation Advantage

• Physical characteristics
• Technically simple vs complex – brick vs airplane
• Meets uncomplicated vs complex needs – nails vs vacation
• Potential for differentiation is limited only by the boundaries of
human imagination

• Differentiation and Segmentation

• McDonald’s consistency
• FedEx’s reliability
• AmEx’s status
• Sony’s innovation
Drivers of differentiation advantage
• Demand-side potential
• The product – what needs does it satisfy?
• The customer – their choice criteria? what motivates them?
• Techniques
• Multidimensional scaling
• Conjoint analysis
• Value curve analysis
• Hedonic price analysis

• Supply-side potential – Uniqueness & Brand

1. Product features and performance
2. Complementary services (credit, delivery, repair)
3. Marketing activities
4. Quality of inputs
5. Degree of vertical integration
6. Skills and experience of employees
7. Location
Using Value-chain to analyze costs

1 • Disaggregate firm into separate activities

2 • Establish the relative importance of different activities in total cost of product

3 • Compare cost by activity

4 • Identify cost drivers

5 • Identify linkages

6 • Identify opportunities for reducing cost

Strategies to fight low-cost rivals
1. Differentiate
2. Add a low-cost business
3. Switch to selling solutions
4. Become exclusively a low-cost provider
Potential pitfalls of cost leadership
1. Too much focus on few value-chain activities
2. Increase in cost of the input on which advantage is based
3. Easy to imitate strategy
4. Lack of parity on differentiation
5. Reduced flexibility
6. Obsolescence of basis of cost advantage
Using Value-chain to analyze differentiation

• Construct a value chain for the firm and the customer

1

• Identify drivers of uniqueness of each activity

2

• Select the most promising differentiation variables for the firm

3

• Identify linkages between value chain of firm and that of the buyer
4
Potential pitfalls of differentiation
1. Uniqueness that is not valuable
2. Too much differentiation
3. Too high a price premium
4. Dilution of brand through product-line extensions
Thank you