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Strategic Management 3
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6.4 Business-Level Strategy and the Five Forces:
Benefits and Risks LO 6-4
POWERPOINT SLIDES 34–36
END OF CHAPTER ETHICAL/SOCIAL ISSUES 1
Suppose Procter & Gamble (P&G) learns that a relatively new startup company Method (www.methodhome.com) is
gaining market share with a new laundry detergent in West Coast markets. In response, P&G lowers the price of its
Tide detergent from $18 to $9 for a 150-oz. bottle only in markets where Method’s product is for sale. The goal of this
“loss leader” price drop is to encourage Method to leave the laundry detergent market. Is this an ethical business
practice? Why or why not?
Notice we did not ask if this is legal. There are many practices that are legal, but may not be considered ethical or moral
behavior. A loss leader approach is not uncommon in retailing and larger firms can afford to do it longer than smaller firms.
EXPANDED THEORY
EXPERIENCED FACULTY: Companies seek to reach the productivity frontier, which represents a set of best-in-class strategic
positions the firm can take relating to value creation and low cost at a given point in time. Reaching the productivity frontier
increases the likelihood of achieving a competitive advantage. Falling behind the productivity frontier, in contrast, results in a
To illustrate this concept, let’s look at the competitive dynamics in the $350B PC industry between 2010 and 2013. Since
2010 the industry has been in decline, partially due to consumer substitution with tablet computers or smartphones.
You can demonstrate the dynamics of competitive positioning by visualizing the different competitive positions of Apple,
Dell, HP, and Lenovo over time. The horizontal axis in the chart indicates best practice in cost leadership, and the vertical
axis indicates best practice in differentiation. Combining cost leadership and differentiation, the company that seeks a blue
ocean strategy stakes out a position in the center part in the best-
practice frontier (somewhere between the axes). The dotted line
shows the productivity frontier. The year 2010: As a
differentiator, Apple had carved out a strong strategic position.
their mobile devices and content conveniently. Given their
stronger focus on corporate IT departments than the consumer
market, HP, Dell, and Lenovo were hit harder by the 2008–2009
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recession than Apple. HP attempted to stake out a blue ocean strategic position, providing “high-tech at low cost,” but was
unable to reconcile the thorny cost-differentiation trade-off. HP was unable to reach the productivity frontier. Lenovo did not
yet have a clear strategic profile as either a differentiator or low-cost leader. Nor did it have a strong presence outside China
and other Asian markets. Both HP and Lenovo were stuck in the middle, able to offer neither value-creating differentiation
Fast-forward to 2013: The competitive dynamics look quite different. Apple has been struggling to continue its innovation
home runs. Apple strove to reduce costs to compete more effectively outside the U.S. and its pace of innovation slowed
relative to rivals, such that its products were less distinctively differentiated. It changed its strategic position more toward
blue ocean, but fell behind the productivity curve. Partly as a consequence of a failure to clearly formulate a business and
corporate strategy, demand for HP computer hardware fell by as much as 25 percent. Likewise, Dell continued to experience
market share. Clear strategic positioning rewarded the company with a competitive advantage.
Fast forward to 2016: After explaining this concept to students, you could ask them to extend the productivity frontier to
2016, plotting each firm’s position, as a homework assignment.
6.5 Blue Ocean Strategy: Combining
Differentiation and Cost Leadership LO 6-5
POWERPOINT SLIDES 37–45
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 38 AND 68
Renee Mauborgne, coauthor of Blue Ocean Strategy provides a brief overview of the thinking behind this theory. It can be
used to introduce your lecture on this topic or to add interest to an online course.
EXAMPLES
POWERPOINT SLIDE 38
NEW FACULTY: A successful blue ocean strategy requires that trade-offs between differentiation and low cost are reconciled.
This is often difficult because differentiation and low cost are distinct strategic positions that require the firm to effectively
POWERPOINT SLIDE 40
Success in a blue ocean strategy doesn’t imply that the firm must be the highest-value creator and the lowest-cost producer in
its respective industry. Whether a blue ocean strategy can lead to competitive advantage depends on the difference between
value creation (V) and cost (C), and on the resulting magnitude of economic value created (V – C). What matters in gaining
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has been able to effectively compete with Nordstrom mostly by achieving a much lower-cost position, while offering an
acceptable shopping experience when compared with Nordstrom. On the other hand, Target has been able to compete with
POWERPOINT SLIDE 40
Examples of ways in which firms can simultaneously add value and lower cost: Through techniques such as total quality
management, companies design and build products with quality in mind, while increasing their differentiated appeal. By
building in better quality, companies lower the cost of both production and after-sale service requirements. From the
customer’s perspective, the product has increased value because it reduces the total cost of ownership. Advances in
POWERPOINT SLIDE 40
Amazon is using “gig workers” to deliver packages in Seattle. They are taking advantage of the availability of low-cost part-
time independent contractors to deliver an enhanced customer service (delivery times as fast as one hour) at low cost. (See
“Amazon Taps ‘On-Demand’ Workers for One-Hour Deliveries” G Bensinger 9/29/15 The Wall Street Journal.)
POWERPOINT SLIDE 41
The startup Leopard Cycles, founded in 2004, shows how to address the necessary trade-offs inherent in a blue ocean
strategy. A customized road-race bicycle like those ridden by professionals such as Lance Armstrong, Alberto Contador, or
Meredith Miller was once an expensive proposition that could cost up to $20,000. Combining the latest flexible-
manufacturing techniques with Internet-enabled technologies, Leopard Cycles offers mass-customized race bicycles built
POWERPOINT SLIDE 41
Avon has been able to raise the perceived value of its products while lowering its production costs. Under the leadership of
its CEO, Andrea Jung, it began to pursue a blue ocean strategy in 2002 by investing over $100m in R&D and building a new
research facility. Avon’s R&D investments were intended to increase the perceived value of its products, by developing
cosmetics that look good and are good for the skin. In the same year, she began to lower Avon’s cost structure by investing
more than $50m into optimizing its supply chain. Avon’s shift from a differentiation strategy to an integration strategy
seemed to be successful initially, but the firm has struggled since the 2008 recession.
stumbled as questions arose whether the company could maintain its stellar quality record while growing so fast. Korea’s
Hyundai stepped into this void, offering cars that surpass Toyota in quality while attempting to provide luxury similar to
Lexus vehicles. Hyundai’s managers carved out a strong strategic position for the company by focusing on resolving the
trade-offs between luxury, quality, and cost. The ups and downs in the car industry clearly show that competitive advantage
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is transitory. It is a difficult quest to gain competitive advantage; it is even more difficult to sustain it. The tools of strategic
management aid managers in this important challenge.
Strategy Highlight 6.2
POWERPOINT SLIDES 44–45: HOW JCPENNEY SAILED DEEPER INTO THE RED OCEAN
Sadly for JCPenney this is an excellent example of how changes in strategic position can go badly wrong. At first glance, the
strategy change made sense. JCPenney was doing poorly with its cost-leadership strategy because it was not the cost leader.
It did not have the economies of scale, supply management processes, or data management systems to compete with cost
leaders, like Walmart. It did not have the buying or merchandizing savvy to compete effectively with Target or Macy’s, much
less any of the differentiation leaders among department stores. Its stores were not well located and were badly in need of
updating. So clearly some significant change in strategy was needed. This is a good opportunity to remind students that they
DISCUSSION TOPICS
Drawing on knowledge from your supply chain and operations management majors, ask students to discuss how the digital
revolution in manufacturing might create new opportunities for blue ocean strategies (see “The digital-manufacturing
revolution: How it could unfold” Oct 2015 McKinsey Quarterly). AACSB 2015 Standard 9 Integrating knowledge across
fields
INTEGRATION
Case Analysis and Interactive Labeling : Blue Ocean Strategy
This click-and-drag activity builds student comprehension of the differences between a successful value innovation
strategy and a firm that is “stuck in the middle.” The student will read the brief case that complements the textbook
description of IKEA and the retailing industry. Then, the student will move the labels to their correct locations. Then the
student will complete a related quiz with three questions. Difficulty: Medium Blooms: Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from the “click-and-drag” by having students discuss the
different drivers that a successful blue ocean strategy requires. Discussion question 3 at the end of the chapter suggests
using the value chain tool from Chapter 4 to compare how the value chain activities would be different for firms using
cost leadership, differentiation, and value innovation as their business-level strategies.
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END OF CHAPTER DISCUSSION QUESTION 2
POWERPOINT SLIDE: 43
How can a firm attempting to have a blue ocean business-level strategy manage to avoid being “stuck in the middle”?
The business needs to carefully assess how the value gap will be impacted by moving to a blue ocean strategy. If they find
END OF CHAPTER ETHICAL/SOCIAL ISSUES 2
In the chapter discussion on value innovation, IKEA is noted as a firm that has successfully applied these techniques.
What roles, if any, do sustainability and triple-bottom-line factors have in the success of IKEA as a leader in the
furniture industry? (See Chapter 5.)
IKEA takes a three-pronged approach to sustainability. It makes, promotes, and sells products that help people live more
Research Update
Shinkle, G. A., Kriauciunas, A. P., and Hundley, G. (2013), Why pure strategies may be wrong for transition
economy firms. Strat. Mgmt. J., 34: 1244–1254. doi: 10.1002/smj.2060
EXPERIENCED FACULTY: These authors conducted research on transitional economies that were formerly part of the
USSR. They found that pure cost leadership or differentiation strategies were more beneficial than mixed strategies,
consistent with Porter’s theory, in market-oriented environments. However, in low market-orientation environments, they
found pure strategies to be detrimental and attributed that result to a need for ambidexterity and organizational learning in
conditions of high uncertainty. After sharing these results with the students, pair an international student from a
developing nation with one or more domestic students and invite them to discuss why these conclusions might make
sense.
18
6.5 Blue Ocean Strategy: Combining
Differentiation and Cost Leadership LO 6-6
POWERPOINT SLIDES 46–47
STRATEGY SMART VIDEO EXAMPLE
POWERPOINT SLIDE 73
The brief video in this slide illustrates the strategy canvas for two rivals in the airline industry, linking it nicely to the
ChapterCase.
EXERCISES
The Wall Street Journal professor site1 suggests a small group exercise on using the strategy canvas of Kim and Mauborgne
to map the differences between retail stores using slow shopping with those using fast shopping (see “The slower you shop,
the more you spend” E Byron 10/20/15 The Wall Street Journal). As an extension of Strategy Highlight 6.2, it could be used
to map the before and after differences, if JCPenney were to implement slow shopping.
Implications for Strategists
POWERPOINT SLIDES 48–50
END OF CHAPTER DISCUSSION QUESTION 3
In Chapter 4, we discussed the internal value chain activities a firm can perform in its business model (see Exhibit
4.8). The value chain priorities can be quite different for firms taking different business strategies. Create examples of
value chains for three firms: one using cost leadership, another using differentiation, and a third using a value
innovation business-level strategy.
1 Mark Lehrer Strategy Weekly Review email 10/20/15 The Wall Street Journal
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Extended Discussion
P&G is a firm with a long history of success with a differentiation strategy that has had difficulty adapting to a change
in the external environment (see “P&G CEO takes responsibility for company’s performance” S Ng 10/13/15 The Wall
Street Journal and “Procter & Gamble sales dip, but profit rises” S Ng and C Dulaney10/23/15 The Wall Street
Journal). The fact that it is a diversified firm gives you an opportunity to draw the distinction that diversified firms can
set a unique business-level strategy for each industry in which they participate. It might help the students to apply the
chapter concepts better if you ask them to focus for this discussion on a particular product-market business, for example
U.S. laundry detergent. In this market, P&G dominates the high end of the market with a proliferation of incrementally
different Tide products. They have a very strong position in the mid-tier of the market with Gain, Cheer, and Era.
During the recent extended recession, consumers have been moving from the top- and mid-tier to the lowest tier of the
market, causing a loss of market share and profitability for P&G. P&G expected that trend to reverse as the economy
recovered, but it has not done so. P&G’s high marketing intensity and R&D intensity make it difficult for them to
compete on price with the cost leaders.
P&G is pursuing a differentiation strategy. Looking at the value and cost drivers discussed in this chapter and
performance, and brand reputation for price savings that impacted most of the five forces listed in Exhibit 6.7. In the
industry structure, we have seen a rise of new entrants, both those focused on a segment that places a high value on
sustainable, natural products and in private-label store brands. As sales shifted from P&G to store brands, P&G’s
negotiating power with its direct customers (retailers) declined.
P&G has cut its R&D spending, cut other costs, and reduced staffing. Does the firm risk being “stuck in the
middle”? Why or why not? If yes, why would being “stuck in the middle” be a bad strategic position?
Even cutting its R&D and advertising costs, P&G will still be higher cost than private label products. Reductions in the
can be destructive to long-term profitability.
Your task is to help the new CEO, David Taylor, sharpen P&G’s strategic position. Which strategic position
should P&G stake out? Which value and/or cost drivers would you focus on to improve P&G’s strategic profile?
How would you go about it? What results would you expect?
version of Tide among its mid-tier offerings, in the hopes that this will cause the consumers who have traded down to
the lowest-tier products to come back up to mid-tier P&G products. The new product will be called Tide Simply Clean
and Fresh and will be marketed in a yellow container, rather than orange, and separated on the retailer shelves from
other Tide products. With the lowest-tier market retailing for 7 cents per load and Tide retailing for 20 cents per load,
P&G’s risk of margin cannibalization from this strategy are very high. (See “P&G unveils plan for a budget Tide” The
Wall Street Journal 9/4/13.) AACSB 2015 Standard 9 Application of knowledge and Framing problems and developing
creative solutions
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DISCUSSION TOPICS
Hispanics are a growing segment of the audience for Hollywood movies. How might you implement a focused differentiation
strategy as a movie studio or movie theater chain targeted toward the Hispanic segment? The Wall Street Journal article
“Hollywood takes Spanish lessons as Latinos stream to the movies” 8/9/13 offers some obvious ideas, such as Hispanic cast
members and Spanish-speaking parts. It also points to targeting the action/adventure genre that has strongest appeal in the
To illustrate the point that focus strategies require an intense understanding of the target customer segment and the ability to
anticipate changes in customer needs and preferences within that group, you might want to use a teen clothing retailer.
Abercrombie & Fitch grew rapidly in this segment for a few years, but then it lost its “touch” during the recent recession.
Students are likely to be able to add to this discussion with examples of firms that specifically target their demographic with
Wall Street Journal 3/21/13.)
EXERCISE
Students enjoy the opportunity to practice implementing generic strategies. You can choose any consumer industry and
assign one of the four generic strategies to each team of students. Then invite the students to plan a new business in that
industry with that strategy. Ask them to identify the value and cost drivers and describe how they will implement them for
Strategy Term Project: Mission, Goals, and the
Strategic Management Process
Term Project Module 6
In this section, you will study the business strategy of the firm you have previously selected for this project. Be sure to
instruct the students to focus only on ONE business unit if they have selected a larger firm with several operations.
Does your selected business have differentiated products or services? If so, what is the basis for this differentiation
from the competition?
Does your firm have a cost-leadership position in this business? If so, can you identify which cost drivers it uses
effectively to hold this position?
Financial analysis of the focal firm and key competitors is the clearest way to determine if the firm has cost leadership. Many
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What is your firm’s approach to the market? If it segments the market, identify the scope of competition it is using.
The market scope should be taken relative to the competitors in the industry of focus. For example, in the furniture industry
Using the answers to the preceding questions, identify which generic business strategies your firm is employing. Is the
firm leveraging the appropriate value and cost drivers for the business strategy you identified? Explain why or why
not.
As noted in the chapter, each business strategy is context-dependent. What do you see as positives and negatives with
the selected business strategy of your firm in its competitive situation?
Create a strategy canvas (see Exhibit 6.10) for your firm. Set on the horizontal axis an appropriate selection of the
value curve items and on the vertical axis, set the other industry segments (such as strategic groups) for comparison.
What suggestions do you have to improve the firm’s business strategy and strategic position?
Here, the student should think through the chapter material and the copious information they have already collected on the
INTEGRATION
HP Running Case: Module 6
While offering each student the opportunity to explore and analyze the company of his/her choice can add interest to the
exercise, there are many advantages for an instructor when the entire class works on the same firm. Connect allows you to
do this with a running case for a single firm that encompasses every chapter in the textbook and tracks the Strategy Term
Project. Hewlett-Packard is provided as an example firm your students can use to see what information and analysis
would be helpful to cover this portion of the term project.
Note to the Instructor, Question 12 (Graduate Level): The answer to this question is subjective based on the student’s
opinion as well as the discussion points that have been reviewed in class. Some points to consider when checking their
answer for thoroughness and logic include: the types of customers that HP serves, the customer needs that HP attempts to
satisfy, the intent behind why HP wants to satisfy their customers, and how HP is positioned to satisfy those customer
needs.
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my
Strategy
POWERPOINT SLIDES 62–63
Employees and consultants say the Amazon workplace is the epitome of a “do more for less cost” environment. We
recognize this is a hallmark goal of a cost-leadership business strategy. But ask yourself this key question, Is it the type
of high-pressure work environment in which YOU would thrive? By 2020 Amazon is planning to have space for 50,000
employees in its Seattle office buildings (an increase of three times the number of employees in 2013). They will be
offering bold new ideas and moving Amazon toward being the first trillion-dollar retailer under an intense pressure to
deliver on their goals. The allure from this type of success is compelling and offers tremendous rewards to many
employees, shareholders, and customers. What aspects of success are you seeking in your professional career? Before
you launch into a new project, job, or firm, or even before you make a change in industry in the effort to move
forward in your career, always consider the trade-offs that you would and would NOT be willing to make.
This could be a particularly interesting conversation to have in class, especially if you have students that represent multiple
