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Strategic Management 3
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ChapterCase: JetBlue: “Stuck in the Middle (Seat)”?
6.1 Business-Level Strategy: How to Compete for Advantage (LO 6-1)
CONNECT INTEGRATION
Interactive Labeling: Business-Level Strategy
6.2 Differentiation Strategy: Understanding Value Drivers (LO 6-2)
CONNECT INTEGRATION
Case Analysis: Toyota Value Drivers Case
6.3 Cost-Leadership Strategy: Understanding Cost Drivers (LO 6-3)
6.4 Business-Level Strategy and the Five Forces: Benefits and Risks (LO 6-4)
6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership (LO 6-5, LO 6-6)
6.6 Implications for the Strategist
Strategy Term Project
Chapter 6
Business Strategy: Differentiation, Cost Leadership, and
Blue Oceans
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POWERPOINT SLIDES 1–5
This chapter begins the strategy formulation phase of the Analyze, Formulate, and Implement (AFI) framework. The chapter
takes a close look at business-level strategy and how to compete for advantage. Business-level strategy details the actions
managers take in their quest for competitive advantage when competing in a single product market. The chapter introduces
the generic business strategies and then dives into detail on differentiation and cost-leadership strategies. At the firm level,
performance is determined by value and cost positions relative to competitors. The chapter continues by integrating the five
forces model (from Chapter 3) with business-level strategies to assess the benefits and risks of each strategy as they vary with
industry conditions. Finally, the blue ocean strategy is discussed as a position combining both cost leadership and
differentiation.
Learning Objectives
LO 6-1 Define business-level strategy and describe how it determines a firm’s strategic position.
LO 6-2 Examine the relationship between value drivers and differentiation strategy.
LO 6-3 Examine the relationship between cost drivers and the cost-leadership strategy.
LO 6-4 Assess the benefits and risks of differentiation and cost-leadership strategies vis-à-vis the five
forces that shape competition.
LO 6-5 Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy.
LO 6-6 Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value
innovation.
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ChapterCase
CONSIDER THIS DISCUSSION QUESTIONS
POWERPOINT SLIDES 60–61
Despite its initial success, why was JetBlue unable to sustain a blue ocean strategy?
Its value-added investments in equipment and services cost more to offer than the revenue that they generated. As the firm
JetBlue’s chief marketing officer, Marty St. George, was asked by The Wall Street Journal, “What is the biggest
marketing challenge JetBlue faces?” His response: “We are flying in a space where our competitors are moving
toward commoditization. We have taken a position that air travel is not a commodity but a services business. We want
to stand out, but it’s hard to break through to customers with that message.” Given St. George’s statement, which
strategic position is JetBlue trying to accomplish: differentiator, cost leader, or blue ocean strategy? Explain why.
Which strategic moves has the new CEO, Robin Hayes, put in place? Do these moves correspond to St. George’s
understanding of JetBlue’s strategic position? Why or why not? Explain.
Consider JetBlue’s value curve in Exhibit 6.10. Why is JetBlue experiencing a competitive advantage? What
recommendations would you offer to JetBlue to strengthen its strategic profile? Be specific.
To escape from its “stuck in the middle” position, JetBlue needs to move its curve either up or down. If it is going to try to
6.1 Business-Level Strategy: How to Compete for
Advantage LO 6-1
POWERPOINT SLIDES 6–12
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 7 AND 71
This animated video in slide 71 describes each of the generic strategies. It can be assigned before class as preparation for
your lecture, it can be used to add interest to an online course, or it can be used as an opener for your lecture.
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EXAMPLE
Different generic strategies can lead to competitive advantage, even in the same industry. For example, Rolex and Timex
both compete in the market for wristwatches, yet they follow different business strategies. Rolex follows a differentiation
strategy: It creates a higher value for its watches by making higher-quality timepieces with unique features that last a lifetime
and that bestow a perception of prestige and status upon their owners. Customers are willing to pay a steep premium for these
attributes. Timex, in contrast, follows a cost-leadership strategy: It uses lower-cost inputs and efficiently produces a
wristwatch of acceptable quality, highlights reliability and accuracy, and prices its timepieces at the low end of the market.
The issue is not to compare Rolex and Timex directly—they compete in different market segments of the wristwatch
industry. Both can achieve a competitive advantage using diametrically opposed business strategies. This is because both
have a clear strategic profile. Rather, the idea is to compare Rolex’s strategic position with the next-best differentiator (e.g.,
Ebel), and Timex’s strategic position with the next-best, low-cost producer (e.g., Swatch). In the preceding example, Rolex
DISCUSSION TOPICS
POWERPOINT SLIDE 8
NEWER FACULTY: Use Exhibit 6.1 to pull together several topics touched on in previous chapters. Chapter 1 noted that
competitive advantage is based on the interdependence of firm and industry effects (on the left side of the figure). The blue
boxes at the top of the figure bring out industry elements discussed in Chapter 3. The brown boxes in the lower part of the
diagram are the primary subjects for this chapter. There are two fundamentally different business strategies: differentiation
and cost leadership. They are generic due to their wide application to disparate organizations. The scope of competition must
also be considered. The business can target a broad audience or a narrow or niche market. Strategic position is the profile
based on value creation and cost. Higher value tends to require higher cost, thus the need for trade-offs for businesses to
choose between a cost or value position. The generic strategies will build on the marketing courses the students have had
prior to this strategy course. The narrow and broad competitive scope complements well with selling into broad or niche
target markets.
Focused cost-leadership strategies often lead to products that appeal to a wide range of customers beyond the targeted
customer segment. If you create a low-cost structure for your firm and then use that position to market products designed to
meet the specific desires of a focused customer segment, plus the general desire to save money, you may find that the general
desire to save money attracts more customers from outside your target segment than from within it. This is a particular
problem when the non-target customers are viewed by the target customers as less prestigious or less attractive to imitate.
This is both a strategy problem and a marketing problem. Students will be able to relate to this problem when you pose it as
INTEGRATION
Interactive Labeling: Business-Level Strategy
This interactive drag-and-drop exercise covers the textbook examples of firms using a variety of generic business-level
strategies. The student will read the brief application case and move the firm name into the correct box provided. A
related quiz with questions follows the interactive activity. Difficulty: Medium Blooms: Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from this interactive by using small group exercise 2 at
the end of the chapter in the class or as a homework assignment. This exercise provides a list of firms the students can
place into one of the generic business-level strategies. Most students will know several firms well enough to place them
in a business-level strategy, or the student can research online for a more thorough analysis of firm strategies.
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products targeted to young, hip, college students that are priced to make them accessible. If too many senior citizens are
attracted to the products by the price, it can reduce the product’s appeal to the young, hip, target demographic. An example
might be a new restaurant near campus designed to have a very contemporary, young vibe and budget price. If this becomes
the new favorite place for older faculty to bring their children for dinner, can it still attract its target market? Carmakers have
experienced this problem also. They have designed, advertised, and positioned the Kia Soul, the Ford Fiesta, and the Fiat 500
to target millennials. However, in the first half of 2013, 42 percent of the buyers were nearer retirement age and only 12
percent were under 34. “Who’s buying ‘youth’ cars? Seniors” The Wall Street Journal 8/13/13. AACSB 2015 Standard 9
Integrating knowledge across fields
EXPERIENCED FACULTY: A few years ago we would have put Porsche in the focused differentiation category. In recent
years, however, they have moved to a broad differentiation strategy, by offering not just two-seater, convertible sports cars,
willingness-to-pay for Porsche products is its brand image as a sports carmaker. However, in 2012, four door sedans and
SUVs made up more than 75 percent of sales worldwide and 93 percent of sales in the important Chinese market. Continuing
in this direction may lose the ‘halo’ value of the sports car image, putting pressure on pricing across the entire product line.
You can use this issue to conduct a debate, with one group of students assigned to represent a long-term brand management
END OF CHAPTER DISCUSSION QUESTION 1
What are some drawbacks and risks to a broad generic business strategy? To a focused strategy?
As the text notes, there is no single correct generic strategy for a specific industry. A drawback of a broad business strategy is
EXERCISES
POWERPOINT SLIDE 12
We have at times split the class into small groups and assigned each group a different consumer industry, and then asked each
group to identify firms in the industry and where they fit in the 2×2 rubric in Exhibit 6.2. The JCPenney Strategy Highlight
6.2 can be a starting point for analysis of the department store industry. Other industries the students are very familiar with
are restaurants, shoes, personal computers, and automobiles.
We find it helpful to remind the students of the strategic group discussion (in Chapter 3) as this tool identifies business
strategies that would be similar or different from one firm to the next. If used within a large industry, the results should yield
a list of firms that make up strategic groups and are direct competitors with each other within the groups. You could, for
example, ask students to analyze the airline industry. Make sure that they do not limit themselves to one firm in each box of
the rubric. Begin with the ChapterCase on JetBlue to start them off. After they have completed their analysis in small groups,
then pull up the strategic group map from Chapter 3 (Slide 54 or Exhibit 3.5) and invite students to compare/contrast their
output with the strategic groups map. AACSB 2015 Standard 9 Analytical thinking (be able to analyze and frame problems)
POWERPOINT SLIDE 12
EXPERIENCED FACULTY: In the following table, the columns show some optional advertising approaches used by companies
to communicate the value of their product in order to influence your buying decisions, and the rows list some familiar
product categories. For each product category, first consider how each type of advertising might influence you, then rank
from 1 (not at all) to 5 (strong influence) and enter that number in the cell. Most consumers use different criteria to make
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purchase decisions for different categories of product. Compare your rankings with those of other students in the class. What
approaches not included here have a stronger influence on your buying decisions? Second, for each advertising approach,
decide whether you think it would be more likely to be used for products sold by a company using a differentiation (D), cost-
leadership (CL), or integration (I) strategy and enter the letter abbreviation of that strategy under the column heading.
Compare your responses with those of other students and discuss why differentiators and cost leaders may choose similar or
different advertising approaches.
TV/Movie
Product
Placement
Celebrity
Endorsement
Sustainability
Claims
Social Media
Comments
Point of
Purchase
Display
Print
Media
Ads
Low Price
Assurance
Mobile
Devices
Casual
Clothing
Sporting
Goods
Airline
Ticket
Car
Food
Computer
This exercise would work best as a small group discussion that is later selectively shared with the full classroom. Ask each
student to complete the table before arriving in class. Then match their answers against those of other students in a group of 2
or 3. Ask them to draw on what they know about marketing to make a determination of the effectiveness (reach, richness,
relevance, and cost) of each type of communication for that industry. Richer media allow more information to be
communicated. Communication that is more narrowly targeted toward the customer is higher in relevance. Focus strategies
may be communicated more often using high relevance media. Differentiation strategies need richer media to communicate
information about products and services. Cost-leadership strategies need very low-cost media. AACSB 2015 Standard 9
Integrating knowledge across fields
END OF CHAPTER SMALL GROUP EXERCISE 2
POWERPOINT SLIDE 65
The table that follows includes a list of prominent firms. Select one of the five categories of generic business-level
strategies—broad cost leadership, focused cost leadership, broad differentiation, focused differentiation, and value
innovation—that you would apply to each firm. Add that strategy to the table, and explain your choices.
The list of firms is intended mostly to spark students to think about different types of industries and firms. Students should be
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Ann Taylor
Broad Differentiation
C.F. Martin & Co.
Narrow Differentiation
BIC
Narrow Cost Leadership
McKinsey & Co.
Narrow Differentiation
Google
Broad Differentiation
Ryanair
Narrow Cost Leadership
Goya Foods
Narrow Differentiation
Samuel Adams
Narrow Differentiation
Greyhound Lines
Narrow Cost Leadership
Singapore Airlines
Broad Differentiation
What are some common features of the firms you have placed within each category?
Students should address the target market segments the businesses have as customers for a broad or narrow portion of the
population. Then, they should consider some basic financial priorities of the firm. For example, Nike and Coca-Cola both
6.2 Differentiation Strategy: Understanding Value
Drivers LO 6-2
POWERPOINT SLIDES 13–20
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 14 AND 70
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EXAMPLES
POWERPOINT SLIDE 15
NEWER FACULTY: Differentiation strategy will add unique or otherwise rare features to increase the value as viewed by the
customers. This value in turn will drive a higher price for the product or service. Alternatively, differentiators excel at
POWERPOINT SLIDE 18
In 1989, Lexus needed a perfect launch of its new line of luxury vehicles to stand a chance against the strong competitors in
the market. Yet its LS400 line required a recall a little more than a year after launch. Lexus’s initial quality problems could
have spelled an early doom for the new brand, whose slogan is “The Relentless Pursuit of Perfection.” To address this serious
threat, Lexus called each owner individually and advised bringing the car in for the recommended repair. When owners
the United States.
POWERPOINT SLIDE 18
The hotel industry provides a second example of superior customer service. Following its mission, “We are Ladies and
Gentlemen serving Ladies and Gentlemen,” the Ritz-Carlton has become one of the world’s leaders in providing a
personalized customer experience based on sophisticated analysis of data gathered about each guest, including past choices. It
offers personalized customer service that few hotel chains can match.
POWERPOINT SLIDE 17
The luxury carmaker BMW follows a differentiation strategy. It has a strong reputation for superior engineering, built
through decades of continued R&D investments. As a result, a BMW M3, a sports coupé, comes with many more
performance features than regular sedans. The high-performance capabilities of an M3 also come with a premium price.
POWERPOINT SLIDE 17
GoPro has a focused differentiation strategy. It sells cameras for sports enthusiasts that are continually innovated to be
smaller and more effective for its target market use.
INTEGRATION
Case Analysis: Toyota Value Drivers Case
This case analysis explores Toyota customer service from early successes with the Lexus to more recent problems the
firm has had. The activity reinforces the value drivers discussed in the textbook. Students will read the case and then
answer the four questions following it. Difficulty: Medium Blooms: Evaluate AACSB: Analytic
Follow-Up Activity: The instructor can build on these concepts by having the class or small groups develop examples of
firms using the other two value drivers (product features and complements). Examples can be successful or failed
attempts of firms building competitive advantage with these levers.
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POWERPOINT SLIDE 17
and convenience of buying coffee at the grocery store or other “one stop shop.” (See an interview with Jean-Marc Duvoisin,
CEO Nestlé Nespresso, “Nespresso’s single serve plan focuses on China, U.S.” The Wall Street Journal 5/21/13.) Invite
discussion on the pros and cons of Nestlé’s differentiation position (versus cost leadership) and direct to consumer business
model (versus retail distribution). In what ways does the unique distribution business model support the differentiation
strategy? Ask marketing students to analyze Nespresso’s strategy in terms of the 4P framework. AACSB 2015 Standard 9
Integrating knowledge across fields
EXTENDED DISCUSSION
POWERPOINT SLIDES 16 AND 20
Many students know of Whole Foods and some have shopped in their stores. The idea that they use differentiation should be
pretty easy for the students to understand. Most will comment that the prices are higher at Whole Foods than a typical
grocer (like Kroger or Safeway), but the quality of the food is also considered to be better. One of the ways we like to bring
up the subject of the need for Whole Foods to change is to talk about the organic food market today versus when Whole
Foods opened in 1980. “When Walmart is a major retailer for organic foods, you can’t really call that a differentiator today,
can you?” Whole Foods WAS organic foods when they started and they had the large-scale market mostly to themselves
competing chiefly against local food co-ops and small specialized food outlets, but this is clearly not the case in 2015, when
information to Whole Foods customers. This customization of the retail space is likely to be viewed positively by the store’s
clientele, but it also takes time and money to create and hold the events. Will the extra costs result in extra sales?
They are also building on a growing movement to fight childhood obesity by putting salad bars in schools. Whole Foods is
creating a good customer experience by treating employees well (and being on the “best companies to work for” list every
year). This creates improved customer service experiences.
STRATEGY SMART VIDEO EXAMPLE
POWERPOINT SLIDE 72
In the brief video in this slide a blogger offers ideas on how to find deals and good value in Whole Foods. It can be used to
introduce the following discussion question.
Whole Foods is trimming its cost structure. Does the firm risk being “stuck in the middle”? Why or why not? While
this is a possibility, it seems that the focus for Whole Foods is still squarely on differentiation. They are just trying to be
What other methods could Whole Foods use to successfully drive its business strategy? Students may come up with a
wide variety of creative ideas with this question. The key point is that the answers are grounded in discussions of value,
cost, and scope of competition. For example, students could say Whole Foods should move into a membership model
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6.3 Cost-Leadership Strategy: Understanding Value
Drivers LO 6-3
POWERPOINT SLIDES 21–33
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 22 AND 69
In this video in slide 69 Michael Porter describes the cost leaders generic strategy. It can be assigned before class as
preparation for your lecture or it can replace your lecture on this aspect of business-level strategy in an online course.
EXAMPLES
POWERPOINT SLIDE 25
The South African company De Beers has long held a very strong position in the market for diamonds because it tightly
controls the supply of raw materials. The aluminum producer Alcoa has access to lower-cost bauxite mines in the United
States, which supply a key ingredient for aluminum. GE, through its GE Capital division, has a lower cost of capital than
other industrial conglomerates such as Siemens, Philips, or ABB.
POWERPOINT SLIDE 26
NEWER FACULTY: Economies of scale are illustrated in Exhibit 6.5, which visually shows the range of scale impacts. Royal
POWERPOINT SLIDE 26
The example of W. L. Gore for diseconomies of scale comes from the very readable book The Tipping Point by Malcolm
POWERPOINT SLIDE 27
Chipmaker AMD cannot muster the scale in production that Intel enjoys and thus is not able to drive down its cost as much.
This puts AMD at a competitive disadvantage.
One of the biggest challenges for the cost-leadership strategy is that there are often low barriers to imitation in cost cutting.
As an example, you can discuss the flurry of phone makers trying to imitate Xiaomi’s strategy (see “Rivals try to reinvent
Xiaomi business model” E Dou 9/8/15 The Wall Street Journal).
Research Update
Kehoe, R. R. and Tzabbar, D. (2015), Lighting the way or stealing the shine? An examination of the duality in star
scientists’ effects on firm innovative performance. Strat. Mgmt. J., 36: 709–727. doi: 10.1002/smj.2240
EXPERIENCED FACULTY: This research looks at the role that star scientists have in both a firm’s innovation productivity and
in providing leadership to non-star scientists. It offers a springboard for a discussion linking Chapter 4 and Chapter 6 with
a discussion of the demand for firms with a differentiation strategy to compete for talent as much as they compete for
sales.
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Strategy Highlight 6.1
POWERPOINT SLIDES 30–31: DR. SHETTY: “THE HENRY FORD OF HEART SURGERY”
This is a useful example of cost leadership for students because it shows that the cost-leadership strategy is not confined
exclusively to commodity products or frequently purchased items. It also incorporates more than one aspect of cost drivers,
mentioning learning curves, economies of scale, and input costs.
DISCUSSION TOPICS
POWERPOINT SLIDES 26 AND 29
EXPERIENCED FACULTY: Scale benefits explain the rise of superstores that are often 200,000 square feet or more. Retailers
that have leveraged the superstore concept to emerge as category killers are Toys“R”Us, Home Depot, Barnes & Noble, and
Best Buy. Now in a new wave of industry evolution, Amazon is “killing the category killers.” Ask students if they can
POWERPOINT SLIDE 24
NEWER FACULTY: Consider Southwest Airlines, what happens to competitive advantage when a firm with a cost-leadership
strategy changes its target customer from one with basic needs to one with more complex needs or expands into high
cost/high time delay airports as Southwest has done with its moves into Newark, LaGuardia, Los Angeles, and San Francisco,
and added the increased complexity of international flights? Which parts of the value chain have experienced increased costs?
POWERPOINT SLIDE 23
EXPERIENCED FACULTY: By its third year of operation (2013), Xiaomi had captured 5 percent of the Chinese smartphone
market. It expects to almost triple its sales in 2014. It sells its handset for approximately half the price of an iPhone 5C. They
sell the phone at near cost and seek supplemental revenue from sales of accessories and branded merchandise. In a process
somewhat akin to that of Threadless, they seek user suggestions on tweaks to its version of the Android OS and send users
weekly updates. (See “How upstart Xiaomi rattled China’s smartphoneindustry” The Wall Street Journal 10/8/13.) Use this
END OF CHAPTER DISCUSSION QUESTION 4
POWERPOINT SLIDES 26 AND 29
The chapter notes there are key differences between economies of scale and learning effects. Let us put that into
practice with a brief example. A company such as Intel has a complex design and manufacturing process. For instance,
one fabrication line for semiconductors typically costs more than $1.5B to build. Yet the industry also has high human
costs for research and development (R&D) departments. Semiconductor firms spend an average of 17 percent of
revenues on R&D. For comparison the automobile industry spends a mere 3 percent of sales on R&D. Thus Intel’s
management must be concerned with both scale of production and learning curves. When do you think managers
should be more concerned with large-scale production runs, and when do you think they should be most concerned
with practices that would foster or hinder the hiring, training, and retention of key employees?
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Many students will bring work experience to the classroom. At the MBA level, many students will have professional work
experience and can make some contributions on HR practices. One point of this question is to note that HR practices will
END OF CHAPTER SMALL GROUP EXERCISE 2
POWERPOINT SLIDES 23 AND 64
Ryanair clearly has a cost-leadership strategy. They are providing lower-value services and driving their costs low or
generating revenues from fees other airlines are not charging to offset some of their costs. We chose Ryanair as an example
of low-cost leadership to extend the chapter case discussion with a non-U.S. example. Students enjoy finding out about the
Irish company and reflecting on how, in many ways, Ryanair is in the leadership position on cost and price structures.
Ryanair based in Dublin, Ireland has been renowned in Europe as a firm that can make a profit on a $20 ticket by
imposing numerous fees and surcharges. The airline has sought to be the lowest of the low-cost providers in the EU
with a “no frills get you from point A-to-B-model.” More recently Ryanair is on record as saying it wants to be the
“Amazon.com of travel in Europe” by bringing in competitors’ price comparison, hotel discounts, and even concert
tickets. Check out the company website (http://www.ryanair.com) and consider the questions that follow.
If you were a competitor in the European market, such as British Airways or Lufthansa, how would you compete
against Ryanair, knowing your cost structure would not allow price parity? If you were a low-cost leader like EasyJet,
how would you compete against Ryanair?
The website link is provided here as the firm may well change its policies on disclosure of fees. This is especially true as
other more traditional airlines are also imposing more fees on the flying passengers. As of the autumn of 2015, the home
page for Ryanair has a link for fees at the bottom of the page in the small print menu under “Information.” Once you click the
button, it opens to two rather legal-looking tables of different fees.
What similarities and differences do you find about Ryanair compared to JetBlue from the ChapterCase?
Perhaps the most salient conclusion that students will reach is that Ryanair makes no pretenses of offering high levels of
