Business-Level Strategy: Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

Chapter 4
Business-Level Strategy
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
2000 South-Western College Publishing
Ch4-1
Strategic
Inputs
Chapter 2
External
Environment
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Strategy Implementation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 10
Corporate
Governance
Chapter 11
Structure
& Control
Chapter 7
Acquisitions &
Restructuring
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 12
Strategic
Leadership
Chapter 13
Outcomes
Strategic
Strategic
Actions
Strategy Formulation
The Strategic
Management
Process
Feedback
Entrepreneurship
& Innovation
Strategic
Competitiveness
Above Average
Returns
Ch4-2
Chapter 2
External Environment
Chapter 3
Sustainable
Competitive
Advantage
Internal Environment
Chapter 4
Business Level
Strategy
Ch4-3
Core
Competenc
y
The resources and capabilities

that have been determined to
be a source of competitive
advantage for a firm over its
rivals.
Ch4-4
Core
Competency
Strateg
y
The resources and capabilities that have been

determined to be a source of competitive
advantage for a firm over its rivals.
An integrated and coordinated

set of actions taken to exploit
core competencies and gain a
competitive advantage.
Ch4-5
Core
Competency
Strategy
Business
Level
Strategy
The resources and capabilities that have been

determined to be a source of competitive
advantage for a firm over its rivals.
An integrated and coordinated set of

actions taken to exploit core competencies
and gain a competitive advantage.
Actions taken to provide value to

customers and gain a competitive
advantage by exploiting core
competencies in specific,
individual product markets.
Ch4-6
Basis for Customer Segmentation

Consumer Markets
1. Demographic factors (age, income, sex, etc.)
2. Socioeconomic factors
(social class, stage in the family life cycle)
3. Geographic factors
(culture, region or country differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns
(heavy, moderate, and light users)
6. Perceptual factors
(benefit segmentation, perceptual mapping)
7. Brand loyalty patterns
Ch4-7
Basis for Customer Segmentation

Industrial Markets
1. End use segments (identified by SIC code)
2. Product segments (based on technological differences
or production economics)
3. Geographic segments (defined by boundaries
between countries or by regional differences within
them)
4. Common buying factor segments (cut across
product/market and geographic segments)
5. Customer size segments
Ch4-8
Generic Business Level Strategies

Source of Competitive Advantage
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Cost
Uniqueness
Cost
Leadership
Differentiation
Focused
Low Cost
Focused
Differentiation
Ch4-9
Cost Leadership Business Level Strategy

Key Criteria:
Relatively standardized products
Features acceptable to many customers
Lowest competitive price
Ch4-10

Requirements:
Constant effort to reduce costs through:
Building efficient scale facilities
Tight control of production costs and overhead
Minimizing costs of sales, R&D and service
State of the art manufacturing facilities
Monitoring costs of activities provided by outsiders
Simplification of processes
Ch4-11
Value Creating Activities Common to a

Human Resource Management
Technological Development
M
A
R
G
IN
Primary Activities
M Service
A
R
G
IN
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
Ch4-12

Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Management Layers to
Reduce Overhead
Firm Infrastructure
Consistent Policies to
Reduce Turnover Costs
Effective Training Programs

to Improve Worker
Efficiency and Effectiveness
Easy-to-Use Manufacturing
Technologies
Investments in Technology in order

to Reduce Costs Associated with
Manufacturing Processes

M
A
R
G
IN
Systems and Procedures to find the

Lowest Cost Products to Purchase
Raw Materials
Frequent Evaluation Processes to

Procurement
Monitor Suppliers Performances
Policy Choice of Efficient Order

Plant Technology Sizes
National Scale
Advertising
M Service
A
R
G
IN
Located in Close
Proximity with
Suppliers
Organizational
Learning
Effective Product
Installations to
Reduce Frequency
and Severity
Products Priced to of Recalls
Generate Sales
Volume
Marketing
& Sales
Small, Highly
Trained Sales
Force
Outbound
Logistics
Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Interrelationships
with Sister Units
Primary Activities
Ch4-13

Inbound
Cost Leadership
Business
Level
Strategy
Logistics
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Reduce Overhead
Firm Infrastructure
Highly Efficient
Systems
to Link
toManagement
Improve Worker
Human Resource
Suppliers
Products with the
Firms
Production
Technologies
to Reduce
Costs Associated with
Processes

Raw Materials
M
A
R
G
IN

Procurement
Monitorin
Suppliers
Located
ClosePerformances
Proximity with
Small, Highly
Sales
Suppliers Trained
Force

National Scale
Advertising
Organizational
Learning
M Service
A
R
G
IN
Located in Close
Proximity with
Suppliers
Marketing
& Sales
Effective Product
Installations to
Reduce Frequency
and Severity
Generate Sales
Volume
Outbound
Logistics
Efficient Plant
Delivery Schedule
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Inbound
Inbound
Logistics
Logistics
Support
Activities
Cost Effective
MIS Systems
Interrelationships
with Sister Units
Primary Activities
Ch4-14

Operations
Firm
Relatively Few
Reduce Overhead
M
Timing of Asset A
R
Investments inPurchases
Technology in order
G
Technologies
IN
to Improve Worker
Policy Choice of
Frequent Evaluation
to
PlantProcesses
Technology
Lowest Cost Products toProcurement
Purchase

Organizational
Learning
Organizational
Small, Highly
Effective Product
Trained Sales
Installations to
Learning
Force
M Service
A
R
G
IN
Located in Close
Proximity with
Suppliers
Outbound
Logistics
Efficient Plant
Delivery Schedule
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Reduce Frequency
and Severity
Generate Sales
Volume
Marketing
& Sales
Raw Materials
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Efficient Plant
Scale to Minimize
Infrastructure
Mfg. Costs
Simplified Planning
Practices to Reduce
Planning Costs
National Scale
Advertising
Interrelationships
with Sister Units
Primary Activities
Ch4-15

Outbound
Cost Leadership Business Level
Strategy
Logistics
Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Reduce Overhead
Firm Infrastructure
Delivery Schedule
that Reduces Costs
M
Human Resource ManagementSelection
A of Low
R
Cost Transport
G
Technologies
IN
Carriers
Efficient Order
Lowest Cost Products toProcurement
Purchase
Sizes
Raw Materials
Located in Close
Proximity with
Suppliers

National Scale
Advertising
Organizational
Learning
Marketing
& Sales
Small, Highly
Trained Sales
Force
Outbound
Outbound
Logistics
Logistics
Efficient Plant
Delivery Schedule
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Effective Product
Interrelationships
Installations to
Reduce
Frequency
with
Sister
Units
M Service
A
R
G
IN

to Improve Worker
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
and Severity
Generate Sales
Volume
Interrelationships
with Sister Units
Primary Activities
Ch4-16

Marketing
& Sales
Relatively Few
Reduce Overhead
Firm Infrastructure

to Improve Worker
Technologies



Raw Materials

Procurement
Located in Close
Proximity with
Suppliers

National Scale
Advertising
Organizational
Learning
Products
Priced
A
R
to Generate
Sales
G
Volume I
National Scale
Advertising
Effective Product
Installations to
Reduce Frequency
and Severity
Generate Sales
Volume
Marketing
&
& Sales
Sales
Small, Highly
Trained Sales
Force
Outbound
Logistics
Efficient Plant
Delivery Schedule
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Small, Highly
Trained Sales Force
M Service
A
R
G
IN
Simplified Planning
Practices to Reduce
Planning Costs
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Interrelationships
with Sister Units
Primary Activities
Ch4-17

Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Reduce Overhead
Firm Infrastructure
Service
Effective Product
Effective Training ProgramsInstallations to
M
Improve Worker
Human
ResourcetoEfficiency
Management
Reduce
Turnover Costs
Reduce
and Effectiveness
A
R
Recalls
Investments in Technology in
order
G
IN
Technologies

Raw Materials

Procurement

National Scale
Advertising
Service
M Service
A
R
G
IN
Located in Close
Proximity with
Suppliers
Organizational
Learning
Effective Product
Installations to
Reduce Frequency
and Severity
Generate Sales
Volume
Marketing
& Sales
Small, Highly
Trained Sales
Force
Outbound
Logistics
Efficient Plant
Delivery Schedule
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Interrelationships
with Sister Units
Primary Activities
Ch4-18

Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Reduce Overhead
Firm Infrastructure

to Improve Worker
Technologies


M
A
R
G
IN

Raw Materials

Procurement
Procurement
Effective Product
Installations to
Reduce Frequency
and Severity
Generate Sales
Volume
Procurement
Systems and Procedures to Find

Located in Close Policy Choice of Efficient Order
theProximity
Lowest
to
PlantProducts
Technology Sizes
with Cost
Suppliers
Purchase
Raw Materials
Organizational
Learning
Interrelationships
with Sister Units
Primary Activities
M Service
A
R
G
IN
Small, Highly
Trained Sales
Force
Marketing
& Sales
Outbound
Logistics
Efficient Plant
Delivery Schedule
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Frequent Evaluation
Processes to Monitor
Suppliers Performances
National Scale
Advertising
Ch4-19

Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Reduce Overhead
Firm Infrastructure

to Improve Worker
Technologies


M
A
R
G
IN

Raw Materials

Procurement
Efficient Plant
Delivery Schedule
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Small, Highly
Trained Sales
Force
Effective Product
Installations to
Reduce Frequency
and Severity
Generate Sales
Volume
Located in Close
Proximity with
Suppliers

National Scale
Advertising
Organizational
Learning
Marketing
& Sales
Outbound
Logistics
Easy-to-Use
Manufacturing
Technologies
Operations
M Service
A
R
G
IN
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Investments in Technology in
order to Reduce Costs Associated
with Manufacturing Processes
Interrelationships
with Sister Units
Primary Activities
Ch4-20

Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Reduce Overhead
Firm Infrastructure

to Improve Worker
Technologies


M
A
R
G
IN
Human Procurement
Resource Management
Located in Close
Proximity with
Suppliers
Cost Transport
Carriers
Generate Sales
Volume

National Scale
Advertising
Organizational
Learning
M Service
A
R
G
IN
Products with the Costs

Firms Production
Timing of Asset
Processes
Purchases
Effective Product
Installations to
to Improve Worker Reduce Frequency
and Severity
Selection of Low Products Priced to of Recalls
Delivery Schedule Small, Highly
that Reduces
Trained Sales
Costs
Force
Marketing
& Sales
Operations
Highly Efficient
Efficientto
Plant
Consistent
Policies
Systems to Link
Scale to Minimize
Reduce
Costs
SuppliersTurnover
Manufacturing

Outbound
Logistics

Raw Materials
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Interrelationships
with Sister Units
Primary Activities
Ch4-21

Simplified Planning
Practices to Reduce
Planning Costs
Relatively Few
Reduce Overhead
Firm Infrastructure

to Improve Worker
Technologies


Technological
Development
Firm Infrastructure
M
A
R
G
IN
Located in Close
Proximity with
Suppliers

National Scale
Advertising
Organizational
Learning
Installations to
Reduce Frequency
and Severity
Generate Sales
Volume
Marketing
& Sales
Trained Sales
Force
Outbound
Logistics

Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Systems to Link
Suppliers
Products with the
Firms Production
Processes
M Service
A
R
G
IN
CostSystems
Effective
Simplified
Planning
Relatively Few
and Procedures to find
the
Cost Products toProcurement
Purchase
Suppliers Performances
MIS Lowest
Systems
Practices Monitor
to Reduce
Management Layers
Raw Materials
Planning
Costs
Overhead
Highly Efficient
Efficient Plant
Delivery
Schedule Small, Highly to Reduce
Effective Product
Inbound
Logistics
Support
Activities
Cost Effective
MIS Systems
Interrelationships
with Sister Units
Primary Activities
Ch4-22
How to Obtain a Cost Advantage

1. Determine and Control Cost Drivers
2. Reconfigure the Value Chain as needed
Alter production process
Change in automation
New distribution channel
New advertising media
Direct sales in place of
indirect sales
New raw material

Forward integration
Backward integration
Change location relative
to suppliers or buyers
Ch4-23
Reconfiguring the Value Chain

of Iowa Beef Packers (IBP)
Old
Way:
New
New
Way:
Way
Ranch
Cattle
Ship on the
Hoof to Rail
Center
(Chicago)
Locate large
automated
plants near
ranches
Slaughter
into sides
of beef
Process into
Boxed Cuts at
plants
Boxed
Cuts at
Markets
Ship cuts
already
Boxed to
Markets
Save on shipping and cattle weight loss

Utilize cheaper non-union rural labor
Ch4-24
Choices That Drive Costs

Economies of scale
Product features
Asset utilization
Performance
Capacity utilization pattern

- Seasonal, cyclical
Mix & variety of products
Interrelationships
- Order processing
and distribution
Small vs. large buyers
Value chain linkages

- Advertising & Sales
- Logistics & Operations
Wage levels
Service levels
Process technology
Product features
Hiring, training, motivation
Ch4-25
Three Key Questions

1. How can an activity be performed
differently or even eliminated?
2. How can a group of linked value
activities be regrouped or reordered?
3. How might coalitions with other
firms lower or eliminate costs?
Gallo sold wine through grocery stores rather than liquor
stores because they were more efficient distributors
Ch4-26
Effective Cost Leaders can remain

profitable even when the
Five Forces appear unattractive
Ch4-27
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
Ch4-28

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
Can mitigate Buyer Power by:

* Driving prices far below competitors
may cause exit and shift power back
to firm
Bargaining
Power of
Buyers
Ch4-29

of
Well positioned relative toThreat
New
Substitutes in order to: Entrants
* Make investments to create
substitutes first
* Buy patents developed by
potential substitutes
* Lower prices to maintain

value position

to the need to:
Cost Competitive
Learning Curve
Bargaining
Power of
Buyers
Threat of
Substitute
Products
Driving prices far below

competitors which may
cause exit and shift power
back to firm
Ch4-30

Bargaining
Power of
Suppliers
Threat of
New
Entrants

to the need to:
Cost Competitive
Learning Curve
Can mitigate Supplier Power by:
Bargaining
Power of
Buyers
* Low cost position makes them better

able torelative
absorb
cost increases
Well positioned
to
Substitutes in order to:

large purchases
* More likely to make very
Threat of
Can
buy
patents
developed
by
*
which
reduces
chance
of
supplier
power
Substitute
* Make investments to create substitutes

value position
Products
back to firm
Ch4-31

Competitors avoid
price wars with Cost
Leaders,
Can frighten offwhich
New Entrants due
Threat of
to the need to:
creates
higher
profits
* Low cost position makes them
Enter
at
Large
Scale
to
be
New
*
better able to absorb cost increases
Cost
Competitive
for
entire
industry
Entrants
* More likely to make very large
Learning Curve
purchases which reduces chance

of supplier power
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Well positioned relative to

Substitutes in order to:
* Make investments to create substitutes
* Can buy patents developed by
value position
Bargaining
Power of
Buyers
Threat of
Substitute
Products

back to firm
Ch4-32
Major Risks of Cost Leadership

Business Level Strategy
Dramatic technological change could take
away your cost advantage
Competitors may learn how to imitate
Value Chain
Focus on efficiency could cause Cost Leader
to overlook changes in customer preferences
Ch4-33

Cost
Breadth of
Competitive
Scope
Broad
Target
Market
Uniqueness
Cost
Leadership
Narrow
Target
Market
Ch4-34

Breadth of
Competitive
Scope
Broad
Target
Market
Cost
Uniqueness
Cost
Leadership
Differentiation
Narrow
Target
Market
Ch4-35
Differentiation Business Level Strategy

Key Criteria:
Value provided by unique features
and value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation
Ch4-36

Requirements:
Constant effort to differentiate products through:
Developing new systems and processes
Shaping perceptions through advertising
Quality focus
Capability in R&D
Maximize Human Resource contributions
through low turnover and high motivation
Ch4-37

M
A
R
G
IN
Primary Activities
M Service
A
R
G
IN
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
Ch4-38

Highly Developed Information
Systems to better understand
customers purchasing preferences
A companywide
emphasis on producing
high quality products
Compensation programs
intended to encourage worker
creativity and productivity
Extensive use of subjective

rather than objective
performance measures
Superior
personnel
training
Coordination among R&D,

product development and
marketing
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
M
A
R
Strong
capability in
basic research
G
IN
Purchase of highest quality
Procurement
replacement parts
Extensive
Rapid and timely personal
product deliveries relationships
to customers
with buyers
Primary Activities
Marketing
& Sales
Rapid responses
to customers
unique
manufacturing
specifications
Outbound
Logistics
Accurate and
responsive order
processing
procedures
M Service
A
R
G
IN
Strong Coordin- Complete field

ation among
stocking of
functions in R&D, replacement parts
Marketing and
Product
Development
Consistent
manufacturing of
attractive
products
Operations
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
Inbound
Logistics
Support
Activities
Firm Infrastructure
Premium
Pricing
Ch4-39

Inbound
Differentiation
Business
Level
Strategy
Logistics
A companywide
of incoming raw
Superior
personnel
M
materials
to
Human Resource
Management
training
A
minimize
damage
R
Strong
andthe
improve
the produce capability in GI
product
development and
allow
firm to consistently
Technological
Development
marketing
basic research
N
quality of the
final product
the highest quality rawProcurement
materials
replacement parts
ation among
stocking of
Marketing and
Product
Development
Rapid responses
to customers
unique
manufacturing
specifications
Extensive
to customers
with buyers
Primary Activities
Marketing
& Sales
Accurate and
responsive order
processing
procedures
Outbound
Logistics
Consistent
manufacturing of
attractive
products
Operations
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product

M Service
A
R
G
IN
Inbound
Inbound
Logistics
Logistics
Support
Activities
Firm Infrastructure
Superior handling
Premium
Pricing
Ch4-40

Operations
Differentiation Business
Level Strategy
Consistent
manufacturing of
Infrastructure
attractiveSuperior
products


personnel
M
Human Resource
Management
training
Rapid responses to AR
Strong
G
customers
unique
product
development and
allow the
firm to consistently produce
capability in
Technological
Development
IN
marketing
highly differentiated manufacturing
products
basic research
specifications
Procurement
replacement parts
Extensive
to customers
with buyers
Primary Activities
Marketing
& Sales
Rapid responses
to customers
unique
manufacturing
specifications
Outbound
Logistics
Accurate and
responsive order
processing
procedures
M Service
A
R
G
IN

ation among
stocking of
Marketing and
Product
Development
Consistent
manufacturing of
attractive
products
Operations
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
Inbound
Logistics
Support
Activities
Firm
A companywide
Premium
Pricing
Ch4-41

Outbound
Differentiation Business Level
Strategy
Logistics
A companywide
Accurate and
responsive order
Superior
intended to encourage worker rather than objective
personnel
M
processing
Human
Resource
Management
training
A
procedures
R
Strong
allow the
Technological
Development

marketing
Procurement
replacement parts
Extensive
to customers
with buyers
Marketing
& Sales
Rapid responses
to customers
unique
manufacturing
specifications
Outbound
Outbound
Logistics
Logistics
Accurate and
responsive order
processing
procedures
Primary Activities
G
IN
Rapid and timely

product deliveries
to customers

ation among
stocking of
Marketing and
Product
Development
Consistent
manufacturing of
attractive
products
Operations
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
capability in
basic research
M Service
A
R
G
IN

Inbound
Logistics
Support
Activities
Firm Infrastructure
Premium
Pricing
Ch4-42

Marketing
& Sales
A companywide
Strong Coordination
among functions in
Superior
Marketing
personnel R&D,
M
Human
Resource
Management
training
andAProduct
R
Strong
Development
G
capability in
Technological
Development
marketing
Procurement
replacement parts
Extensive
to customers
with buyers
Marketing
&
& Sales
Sales
Rapid responses
to customers
unique
manufacturing
specifications
Outbound
Logistics
Accurate and
responsive order
processing
procedures
Primary Activities
IN
Extensive personal
relationships with
buyers

ation among
stocking of
Marketing and
Product
Development
Consistent
manufacturing of
attractive
products
Operations
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
basic research
M Service
A
R
G
IN

Inbound
Logistics
Support
Activities
Firm Infrastructure
Premium
Pricing
Premium
Pricing
Ch4-43

A companywide
Service
Complete field
Superior
stocking of
personnel
M
Human Resource
Management
replacement
training
A
R
Investments in technologies that willparts
Strong
allow the
Technological
Development

marketing

capability in
basic research
G
IN
Procurement
replacement parts
Extensive
to customers
with buyers
Primary Activities
Marketing
& Sales
Rapid responses
to customers
unique
manufacturing
specifications
Outbound
Logistics
Accurate and
responsive order
processing
procedures
Service
M Service
A
R
G
IN

ation among
stocking of
Marketing and
Product
Development
Consistent
manufacturing of
attractive
products
Operations
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
Inbound
Logistics
Support
Activities
Firm Infrastructure
Premium
Pricing
Ch4-44

A companywide
Support
Activities
Firm Infrastructure

Superior
personnel
training

marketing



M
A
R
Strong
capability in
basic research
G
IN
Procurement
replacement parts
Procurement
Procurement
Rapid responses
to customers
unique
manufacturing
specifications
Systems and procedures

used to find the highest
quality raw materials
Extensive
to customers
with buyers
Purchase of highest
quality replacement
parts
Premium
M Service
A
R
G
IN

ation among
stocking of
Marketing and
Product
Development
Marketing
& Sales
Accurate and
responsive order
processing
procedures
Outbound
Logistics
Consistent
manufacturing of
attractive
products
Operations
Inbound
Logistics
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
Located in
Close Proximity
with Suppliers
Pricing
Primary Activities
Ch4-45

A companywide

Superior
personnel
training

marketing



M
A
R
Strong
capability in
basic research
G
IN
Procurement
replacement parts

ation among
stocking of
Marketing and
Product
Development
Consistent
manufacturing of
attractive
products
Accurate and
responsive order
processing
procedures
unique
manufacturing
specifications

to customers
with buyers
Marketing
& Sales
Outbound
Logistics
Operations
Coordination among
Investments in technolR&D, marketing and
ogies to produce highly
Rapid responses
Extensive
product development
differentiated
products
Rapid
and
timely
personal
to customers
Primary Activities
M Service
A
R
G
IN
Superior
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
Inbound
Logistics
Support
Activities
Firm Infrastructure
Strong
capability in
basic research
Premium
Pricing
Ch4-46

A companywide
Support
Activities
Firm Infrastructure

Superior
personnel
training

marketing


M
A
R
Strong
capability in
basic research
G
IN
Human Procurement
Resource Management
Product
Development
Extensive
to customers
with buyers
Primary Activities
M Service
A
R
G
IN
Rapid responses
to customers
unique
manufacturing
specifications
ExtensiveStrong
useCoordinof
Superior
Complete field
among
stocking ofpersonnel
subjectiveation
performance
measuresMarketing and
training
Accurate and
responsive order
processing
procedures
Marketing
& Sales
minimize
damage and
improve the
quality of the
final product
Operations
Inbound
Logistics
Compensation
programs
Superior
Consistent
handling
of
manufacturing
of
which
encourage
worker
incoming raw
attractive
products
materials and
to
creativity
productivity

replacement parts
Outbound
Logistics

Premium
Pricing
Ch4-47

A companywide

Superior
personnel
training

marketing


Technological
Development
Firm Infrastructure
M
A
R
Strong
capability in
basic research
G
IN
ation among
stocking of
Marketing and
Product
Development
Marketing
& Sales
Rapid responses
to customers
unique
manufacturing
specifications
Outbound
Logistics
manufacturing of responsive order

attractive
processing
products
procedures
Operations
handling of
incoming raw
materials to
minimize
damage and
improve the
quality of the
final product
Extensive
to customers
with buyers
Primary Activities
M Service
A
R
G
IN
Highly
developed InformationPurchase of highest
A companywide
emphasis
quality
the highest
rawProcurement
materials
replacement parts
Systems
toquality
better
understand
on producing high quality
customers
purchasing
preferences
products
Strong
Coordin- Complete field
Consistent
Accurate and
Superior
Inbound
Logistics
Support
Activities
Firm Infrastructure
Premium
Pricing
Ch4-48

Effectiveness with Differentiation
grows out of Value Chain activities
Examples:
Heineken beer
Raw materials
Steinway pianos
Raw materials & Workmanship
Mercedes Benz autos
Technology and Workmanship
Intel microprocessors
Technological superiority
Caterpillar tractors
Service buyers needs quickly

anywhere in the world
Ch4-49
Create Value with Differentiation by:

Lowering Buyers Costs
Raising Buyers Performance
Creating Sustainability through:
Creating barriers by perceptions of uniqueness
Creating switching costs through differentiation
Ch4-50
Drivers of Differentiation
Examples:
Unique product features

Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
Ch4-51
Effective Differentiators can remain

profitable even when the
Five Forces appear unattractive
Ch4-52
Effective Differentiators can remain profitable

even when the Five Forces appear unattractive
Threat of
New
Entrants
Can fend off New Entrants

because:
* New products must
surpass proven products
* Or be equal to performance
at lower prices
Ch4-53

Threat of
New
Entrants
Can fend off New Entrants because:

*
New products must

Or be equal to performance
at lower prices
Can mitigate Buyer Power because:

Well differentiated products reduce
customer sensitivity to price increases
Bargaining
Power of
Buyers
Ch4-54

Threat of
New
Entrants

Substitutes because:
* Brand loyalty tends to
reduce new product trial
and brand switching
Threat of
Substitute
Products

*
New products must

at lower prices
Bargaining
Power of
Suppliers
Can mitigate Buyer Power

because well differentiated
products reduce customer
sensitivity to price increases
Ch4-55

Threat of
New
Entrants
Bargaining
Power of
Suppliers

*
New products must

at lower prices
to
* Absorbing price increases dueBargaining
Power of
higher margins

Suppliers
* Passing on higher supplier prices

loyalty tends
to
* Brand
because
buyers
are brand loyal
reduce new product trial and
brand switching
Threat of
Substitute
Products

Ch4-56

*
*
Absorbing price increases

due to higher margins
Passing on higher supplier prices
because buyers are brand loyal
Bargaining
Power of
Buyers
*
Brand loyalty tends to

reduce new product trial and
brand switching
Threat of
New
Entrants
Brand
loyalty
New products must
overcomes
much
* Or be equal to performance
price
competition
at lower
prices
*
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
Bargaining
Power of
Suppliers

Ch4-57
Major Risks of a Differentiation

Business Level Strategy
Customers may decide that the
cost of uniqueness is too great
Competitors may learn how to
imitate Value Chain
The means of uniqueness may no
longer be valued by customers
Ch4-58

Breadth of
Competitive
Scope
Broad
Target
Market
Cost
Uniqueness
Cost
Leadership
Differentiation
Narrow
Target
Market
Ch4-59

Breadth of
Competitive
Scope
Cost
Uniqueness
Broad
Target
Market
Cost
Leadership
Differentiation
Narrow
Target
Market
Focused
Low Cost
Focused
Differentiation
Ch4-60
Focused Business Level Strategies

Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.
However, opportunities may exist because:
Large firms may overlook small niches
Firm may lack resources to compete industry-wide
May be able to serve a narrow market segment
more effectively than industrywide competitors
Focus can allow you to direct resources to certain
value chain activities to build competitive advantage
Ch4-61

May be able to retrofit old factories to keep costs
down
Minimize R&D costs by copying innovators
Examples:
Bang & Olufsen
Snap-on tools
Iams Company
Upscale electronic components

High quality mechanics tools
Premium pet foods
Ch4-62

Focused Differentiators may thrive by selecting a
small market that is underserved by large players
Example:
Custom manufacturers of parts for

Harley-Davidson motorcycles
Ch4-63
Major Risks Involved With a Focused

Firm may be outfocused by competitors

Large competitor may set its sights on your
niche market
Preferences of niche market may change to
match those of broad market
Ch4-64

Cost
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Uniqueness
Cost
DifferenLeadership
tiation
Integrated
Low Cost/
Differentiation
Focused
Focused
DifferenLow Cost
tiation
Ch4-65
Integrated Low Cost/Differentiation Strategy

Firms using an Integrated Strategy may:
Adapt more quickly
Learn new skills and technologies
Utilize Flexible Manufacturing Systems to create
differentiated products at low costs
Leverage core competencies through Information
Networks across multiple business units
Utilize Total Quality Management (TQM) to
create high quality differentiated products which
simultaneously driving down costs
Ch4-66
Recognize that the Integrated Low Cost/

Differentiation business level strategy involves a
Compromise
The risk is that the firm may become Stuck in
the Middle lacking a strong commitment to or
expertise with either type of generic strategy
Ch4-67
Southwest Airlines
Low Cost
Use a single aircraft model
(Boeing 737)
Use secondary airports
Fly short routes
No meals
15 minute turnaround time
No reserved seats
No travel agent reservations
Differentiation
Focus on customer
satisfaction
High level of employee
dedication
New flight services for
business travelers
(phones and faxes)
Ch4-68

Business-Level Strategy: Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

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Chapter 4

The resources and capabilities

The resources and capabilities that have been

An integrated and coordinated

The resources and capabilities that have been

An integrated and coordinated set of

Actions taken to provide value to

Basis for Customer Segmentation

Basis for Customer Segmentation

Generic Business Level Strategies

Cost Leadership Business Level Strategy

Cost Leadership Business Level Strategy

Value Creating Activities Common to a

Value Creating Activities Common to a

Effective Training Programs

Investments in Technology in order

Human Resource Management

Systems and Procedures to find the

Frequent Evaluation Processes to

Policy Choice of Efficient Order

Value Creating Activities Common to a

Systems and Procedures to find the

Frequent Evaluation Processes to

Policy Choice of Efficient Order

Value Creating Activities Common to a

Policy Choice of Efficient Order

Value Creating Activities Common to a

Policy Choice of Efficient Order

Effective Training Programs

Value Creating Activities Common to a

Effective Training Programs

Investments in Technology in order

Human Resource Management

Systems and Procedures to find the

Frequent Evaluation Processes to

Policy Choice of Efficient Order

Value Creating Activities Common to a

Systems and Procedures to find the

Frequent Evaluation Processes to

Policy Choice of Efficient Order

Value Creating Activities Common to a

Effective Training Programs

Investments in Technology in order

Human Resource Management

Systems and Procedures to find the

Frequent Evaluation Processes to

Systems and Procedures to Find

Value Creating Activities Common to a

Effective Training Programs

Investments in Technology in order

Human Resource Management

Systems and Procedures to find the

Frequent Evaluation Processes to

Policy Choice of Efficient Order

Value Creating Activities Common to a

Effective Training Programs

Investments in Technology in order

Human Resource Management

Policy Choice of Efficient Order

Products with the Costs

Frequent Evaluation Processes to

Systems and Procedures to find the