Slide 1Business-Level StrategyTypes of Business-Level StrategyFeatures of the Five Business-Level StrategiesCost Leadership StrategyCost Leadership Strategy – ImplementationSlide 7Cost Leadership Strategy and the Five Forces of CompetitionHow can Low Costs protect against…?Strategy and Organizational StructureCost Leadership Strategy and StructureSlide 12Risks of Cost Leadership StrategyDifferentiation StrategyDifferentiationDifferentiation Strategy – Implementation (cont.)Differentiation (cont.)Slide 18Starbuck’s DifferentiationSlide 20Differentiation Strategy and StructureRisks of Differentiation StrategySlide 23Slide 24Differentiation Strategy and the Five Forces of CompetitionHow can Differentiation protect against…?Can you differentiate……?Can you differentiate…..?Slide 29Slide 30Slide 31Slide 32Can you differentiate…..?Slide 34Slide 35Can you differentiate…..?Slide 37Slide 38Now, I am going to do a card trick.I am going to read your mind.You are going to see a series of cards.You are going to choose one card.Slide 43Are you ready to pick a card?Pick a card.Did you pick a card?Think of it now.I hear you.And now, I will remove your card.Slide 50Your card is gone….yes?Focus StrategyFocus Strategy – Market SegmentsFocus Strategy – ReasonsFocus Strategy – TypesRisks of Differentiation StrategyIntegrated Cost Leadership/Differentiation StrategyRisks of Integrated StrategyCompeting For AdvantagePart III – Creating Competitive AdvantageChapter 5 – Business-Level StrategyBusiness-Level StrategyKey TermsBusiness-Level Strategy – integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets –Types of Business-Level StrategyFeatures of the Five Business-Level StrategiesGeneric, can be used across industriesTwo distinct types of competitive advantage:Low CostDifferentiationChoice of scope:BroadNarrow (niche)Cost Leadership StrategyKey TermsCost Leadership Strategy – integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitorsCost Leadership Strategy – ImplementationNo-frill, standardized goodsContinuously reduce costs of value chain activitiesValue-Creating Activities Associated with Cost Leadership StrategyCost Leadership Strategy and the Five Forces of CompetitionLow-cost position is a valuable defense against rivalsPowerful customers can demand reduced pricesCosts leaders are in a position to absorb supplier price increases and relationship demands, and to force suppliers to hold down their pricesContinuously improving levels of efficiency and cost reduction can be difficult to replicate and serve as significant entry barriers to potential competitorsCost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customersHow can Low Costs protect against…?Low cost leadership does not eliminate any of these forces, it just allows the low costs firm to more easily deal with these forces, or offset the power of these forces, and potentially, remain profitable.Strategy and Organizational Structure Specialization CentralizationFormalizationCost Leadership Strategy and Structure Simple reporting relationshipsFew decision-making and authority layersCentralized corporate staffStrong operational focus on process improvementsLow-cost cultureCentralized staff decision-making authorityJobs specializationHighly formalized rules and proceduresRisks of Cost Leadership StrategyProcesses can become obsoleteFocus on cost reductions can come at the expense of understanding customer perceptions and needsStrategy could be imitated, requiring the firm to increase the value offered to retain customersDifferentiation StrategyKey TermsDifferentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to themDifferentiationOffer attributes that customers want, and are willing to pay for. Leads to premium price, higher volume, loyaltyMarginal revenue must exceed the costs of differentiationPERCEIVED VALUE versusINCREMENTAL COSTSDifferentiation Strategy – Implementation (cont.)Unusual featuresResponsive customer serviceRapid product innovationsTechnological leadershipPerceived prestige and statusDifferent tastesEngineering designPerformanceDifferentiation (cont.)What firms pursue differentiation?How or on what basis do they achieve differentiation?Starbuck’s Differentiation4 Tablespoons of $10 bag = 40 centsThree cupsDouble-Tall Latte = $3.22Double Shot Espresso = $1.85$3.22 - $1.85 = $1.37 for steamed milk20 seconds to steam milk$1.37 * 3 * 60 = $246 a hour to steam milkCustomers “allow” Starbucks to draw interest in their smart-cards.Millions of dollars annually on the float“You are one of us”“Collectible”Pretax profit margins of 10.5%Value-Creating Activities Associated with the Differentiation StrategyDifferentiation Strategy and StructureComplex and flexible reporting relationshipsCross-functional product development teamsStrong focus on marketing and product R&DDevelopment-oriented cultureDecentralized decision makingBroad job descriptionsInformal rules and proceduresRisks of Differentiation Strategyquick imitationno value in uniqueness over differentiationcell phonespremium price or costs are costs too highpoorly understood/changing customer needsMinivan, FAO Schwartzcosts/price become more important than uniquenessunwillingness to offer true differentiationTo introduce his beer, Coors often gave free sample to gold miners...because you can’t sell beer to minors.Differentiation Strategy and the Five Forces of CompetitionCustomer loyalty provides the most valuable defense against rivalsUniqueness products reduce customer sensitivity to raised pricesHigh margins (for differentiated products) insulate from supplier influence Customer loyalty and product uniqueness serve as significant entry barriersFirms with customers loyal to their products are positioned effectively against product substitutesHow can