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 Learning Objectives
• Understand the responsibilities of a business-unit
manager
• Evaluate the effectiveness of a generic business-
level strategy
• Analyze an industry to determine its stage in the
life cycle. Understand how that stage determines
the appropriateness of various business
strategies
• Appreciate the competitive dynamics found in
industries
• Be able to select an appropriate competitive
strategy based on the competitive environment
 Business-level Strategy
Formulation Responsibilities
• Direction Setting
› Establishment and communication of mission, vision,
values, long-term goals of a single business unit
› Creation and communication of shorter-term goals

• Analysis of Business Situation

› Compilation and assessment of information from
stakeholders, broad environmental analysis and other
sources
› Internal resource analysis
› Identification of strengths, weaknesses, opportunities,
threats, sources of sustainable competitive advantage
 Business-level Strategy
Formulation Responsibilities
• Selection of Strategy
› Generic approach to competition—cost leadership,
differentiation, focus or best value
› Strategic posture—specific strategies needed to carry out the
generic strategy
• Management of Resources
› Acquisition of resources and/or development of
competencies leading to sustainable competitive advantage

› Ensure development of functional strategies and an

appropriate organizational design (management structure) to
support business strategy
› Develop control systems to ensure that strategies remain
relevant and that the business unit continues to progress
toward its goals
 Generic Business-level Strategies
Broad/Narrow
Strategy Market Source of Advantage
Low Cost Broad Lowest Cost Production
Leadership
Differentiation Broad Preferred Product or Service
Best Value Broad Low Cost & Highly Desirable
Product or Service
Focus through Narrow Lowest Cost Production
Low Cost
Leadership
Focus through Narrow Preferred Product or Service
Differentiation
Focus through Narrow Low Cost & Highly Desirable
Best Value
 Cost Leadership
• High Capacity Utilization (combined
with accurate demand forecasting)
• Economies of Scale
• Technological Advances
• Outsourcing
• Learning / Experience Effects
 A Typical Learning Curve

unit
cost

total cumulative output

 Risks Associated With Cost
Leadership Strategy
• May not detect required product or marketing
changes due to preoccupation with cost
• Investments in plants and equipment may
become obsolete due to technological
breakthroughs
• Large investments cause reluctance to
change
• Competitors may quickly imitate cost-saving
strategies
• May go too far in cutting costs, thus
endangering customers or employees
 Differentiation
• Uniqueness may be achieved through many
means. Examples are:
› Product innovations
› Superior quality
› Superior service
› Creative advertising
› Better supplier relationships
• The key to success is that customers must be
willing to pay more for the uniqueness of the
product or service than the firm paid to create
it.
 Risks Associated with a
Differentiation Strategy
• Customers may be willing to sacrifice
special features due to a high price
• Customers may no longer perceive an
attribute as differentiating
• A source of differentiation may be easy
to imitate. Constant innovation is
necessary.
 Best Value Strategy
• A combination of strategic elements from
differentiation and low cost
• Firms can increase sales of an attractive product
or service. Sales increases may lead to
efficiency and thus reduced costs
• Consumers are coming to expect a combination
of high quality and low price
• Technological advances often allow a company
to pursue differentiation and low cost at the
same time
• Many companies are pursuing best value
through an emphasis on quality or speed
 Principles of Total Quality
Management
• General
› Get to know the next and final customer
› Get to know the direct competition, and the world-class
leaders (whether competitors or not)
› Dedicate to continual, rapid improvement in quality,
response time, flexibility, and cost
› Achieve unified purpose via extensive sharing of information
and involvement in planning and implementation of change
• Design and Organization
› Cut the number of components or operations and number of
suppliers to a few good ones
› Organize resources into chains of customers, each chain
mostly self-contained and focused on a product or customer
"family"
 Principles of Total Quality
Management
• Operations
› Cut flow time, distance, inventory, and space along the
chain of customers
› Cut setup, changeover, get-ready, and startup time
› Operate at the customer's rate of use (or a smoothed
representation of it)
• Human Resource Development
› Continually invest in human resources through cross-
training (for mastery), education, job switching, and
multi-year cross-career re-assignments; and improved
health, safety, and security.
› Develop operator-owners of products, processes, and
outcomes via broadened owner-like reward and
recognition.
 Principles of Total Quality
Management
• Quality and Process Improvement
› Make it easier to produce or provide the product without
mishap or process variation.
› Record and own quality, process, and mishap data at the
workplace.
› Ensure that front-line associates get first chance at
process improvement--before staff experts.
• Accounting and Control
› Cut transactions and reporting; control causes and
measure performance at the source, not via periodic cost
reports.
 Principles of Total Quality
Management
• Capacity
› Maintain/improve present resources and human work
before thinking about new equipment and automation
› Automate incrementally when process variability cannot
otherwise be reduced
› Seek to have multiple work stations, machines, flow lines,
cells for each product or customer family
• Marketing and Sales
› Market and sell your firm's increasing customer-oriented
capabilities and competencies.

Source: R.J. Schonberger, "Is Strategy Strategic? Impact of Total Quality

Management on Strategy," Academy of Management Executive (August,
1992), p. 83, used with permission.
 Emphasis on Speed
• Reducing Time to Provide Good or Service
› Reduces costs
› Customers happier because they are satisfied more
quickly
• May be accompanied by a flexible
manufacturing system (FMS) or a
simultaneous manufacturing system (such as
C3M at Michelin)
Risks Associated with a Best Value
Strategy
• A Tradeoff Between Risks of Cost Leadership
and Differentiation
› Technological breakthroughs can make the strategy
obsolete
› Risk of imitation
› However,
¤ Unlikely to become preoccupied with cost or
differentiation
¤ Unlikely to take cost cutting too far
¤ Increases likelihood of being able to recover
additional costs associated with differentiation
 Focus Strategy
• Can be based on differentiation, lowest cost
or best value
• Key is to provide a product or service that
caters to a particular market segment.
› Must identify segment
› Must assess and meet the needs of the segment better
than competitors (target marketing)
› May also be called a “niche” strategy
 Risks Associated with a Focus
Strategy
• Risks depend on whether the strategy is
being pursued through differentiation, lowest
cost or best value as well as:
› The desires of the target market can become similar to
the desires of the whole market, thus eliminating
advantage in catering to the target market
› A competitor may focus on an even more narrowly
defined segment of the market
 Competitive Dynamics
• Competitive action and reaction
• Creative destruction
› The inevitable decline of leading firms due to competitive
moves and countermoves
• Competition has been increasing in most
global industries
Strategies that Reflect Competitive Dynamics
• Aggressive Competition
› Exploit ownership of superior resources.
› Overwhelm competitors through a combination of factors that could
include the best products or services, superior advertising, the lowest
production cost, superior design, the lowest price or the strongest
brand name.
• First-mover Advantage
› Invest significantly more time and resources to creating state-of-the-art
products and services than competitors to protect leadership position.
› Organizational learning capacity is important.
• Collaboration
› Partnerships and alliances with stakeholders to offset the influence of
a powerful rival (defensive strategy).
› Or, if a company is the largest rival, create partnerships and alliances
that will block new competition or hurt existing competitors (offensive
strategy).
Strategies that Reflect Competitive Dynamics
• Threat of Retaliation
› Make it very clear to competitors that a firm will retaliate against
any action that will upset the balance in the industry.
› The threat must be believable.
› Firms may compete simultaneously in multiple industries (multi-
market competition). Therefore, a firm could retaliate in another
industry.
• Government Intervention
› A political strategy in which the firm hires lobbyists and creates
strong relationships with political leaders or parties in an effort
to influence the “rules of the game”.
• Create Barriers to Imitation
› Many potential barriers exist, including economies of scale,
patents, special relationships with stakeholders (pre-emptive
collaboration), or private information.
Strategies that Reflect Competitive Dynamics
• Strategic Flexibility
› An organization limits investments in fixed capital and
forms joint ventures or subcontracting agreements to
provide a lot of what it needs so that it is in a position to
quickly move in and out of markets.
• Avoid Direct Competition
› Find a niche in which no other organization has interest.
› Don’t compete with the same intensity in the same
geographical markets competitors.
 Resources, Industry Structure and
Competitive Actions
Change in
Firm A Firm A
Resources Firm A Resources
Action
New Industry More
Industry
Structure Structure
Actions
Firm B
Reaction Change in
Firm B and
Firm B
Resources Resources
Reactions
Firm C Change in
Firm C Reaction
Resources Firm C
Resources

Time
 Strategic Group Map of Restaurants and Specialty Dining

Family Family
Wide Restaurants Restaurants
Economy Upscale
Denny’s Marie Callendar’s Casual Dining Fine Dining
Waffle House Perkins
IHOP TGI Friday’s Steak and Ale Charthouse
Boston Market Cracker Barrel Red Lobster Spago’s
Bob Evans Picadilly Ruby Tuesday
Breadth Bennigan’s Fine Dining
of Menu
Fast Food Applebee’s

Offerings Family Menu Specialized

McDonald’s Ruth’s Chris
Burger King Casual Dining Morton’s
Wendy’s
Jack in the Box Limited Menu
Arby’s Olive Garden
Chevy’s
Fast Food Fast Casual P.F. Chang
Limited Menu Limited Menu Bahama Breeze
Cheesecake Factory
Taco Bell Sbarro Belihana
Del Taco Chipotle
Checkers Starbucks
Subway
Papa John’s
Narrow

Low Pricing/Quality Image High

 Major Concepts in Chapter 5
• The responsibilities of business-level managers
include establishing strategic direction for the
unit, ongoing analysis of the business situation,
selecting a generic strategy and posture, and
acquiring and managing resources.
• Cost leadership entails producing products and
services at the lowest possible cost
• Differentiation means attempting to distinguish
products or services so that they have greater
value to consumers
• Best-value strategies combine elements of low
cost and differentiation
 Major Concepts in Chapter 5
• Focus strategies entail pursuit of a narrowly defined
market segment through cost leadership,
differentiation or best value
• Organizational dynamics is defined as the moves and
countermoves of competitors
• Strategies that reflect competitive dynamics include
aggressive competition, seeking a first-mover
advantage, collaborative agreements with
stakeholders, threats of retaliation, seeking
government intervention, erecting barriers to
imitation, remaining flexible enough to quickly move
in or out of markets, and avoiding direct competition