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Strategic Management 3e Instructor Manual
Chapter 6
Business Strategy: Differentiation, Cost Leadership, and
Blue Oceans
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)
CONNECT INTEGRATION
Interactive Labeling: Blue Ocean Strategy
6.6 Implications for the Strategist
Strategy Term Project
CONNECT INTEGRATION
HP Running Case: Module 6
myStrategy
1
Copyright © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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.
2
ChapterCase
CONSIDER THIS DISCUSSION QUESTIONS
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
grew they went from trying to straddle focused differentiation/focused cost leadership to a more challenging position of
trying to straddle broad differentiation/broad cost leadership.
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.
With no other information than that statement, one would have to conclude that JetBlue is attempting a differentiation
strategy. However, their price positioning in the market, their communication to customers, and their recent actions (see next
question) all suggest that JetBlue is also trying to compete with the cost leaders. This mixed message is characteristic of a
“stuck in the middle” strategy.
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.
Hayes’ decision to reduce legroom is counter to a differentiation strategy and the message communicated by the CMO. His
decision to raise fees for checked baggage runs counter to a strategy to compete effectively with Southwest, but is not too
dissimilar to ultra-low-cost airlines, like Ryanair or Spirit. It is also counter to customer service, as it means that customers
will lug their own baggage more often and there will be more competition for space in overhead bins.
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
compete as a differentiator, as St. George suggests, then the highest priority areas for improvement are likely to be customer
service and reliability. If it wants to compete more effectively with the low-cost airlines, it needs to significantly pare back
costs, by reducing services and amenities. This would likely be the more radical of the two position changes.
6.1 Business-Level Strategy: How to Compete for

Advantage LO 6-1
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.
3
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
focuses on a small market segment: affluent consumers who want to present a certain image. Timex offers watches for many
different segments of the mass market.
The smartphone industry is a bimodal market with Apple as a clear differentiator at one end and Xiaomi and other Chinese
firms with clear cost-leadership positions. Other firms, like Samsung, are “stuck in the middle” and much less profitable as a
result (see “In smartphone market, it’s luxury or rock bottom” C Mims 2/2/15 The Wall Street Journal).
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.
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
4
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,
but a broad range of vehicles including sedans and SUVs to meet the needs of a wide variety of customer segments. This
strategic shift happens often to firms with a focus strategy when the firms have revenue growth aspirations beyond the
growth rate of their target customer segment. Porsche’s new strategy has increased market share, revenue, and profitability,
but it has caused a serious brand positioning problem. One of the primary value drivers supporting high customer
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
leader at the firm arguing the advantages of a strategic change back toward a strong emphasis on sports car sales and another
group of students arguing the advantages of continuing to emphasize the profitable sedans and SUVs from the perspective of
a younger manager who just joined the firm during the past three years. Then invite the class to weigh in on the discussion.
(See “Is Porsche still a sports car maker?” The Wall Street Journal 5/29/13. AACSB 2015 Standard 9 Integrating
knowledge across fields
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
that the firm may be blinded to new entrants that enter the industry through a niche approach. Drawbacks to a more focused
approach could be that the niche you target will not grow or may decline; economic performance will have higher variability
for smaller segments than broader populations; and if economy of scale is important, it can be hard to be large enough to
compete with a focused strategy.
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
5
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 Celebrity Sustainability Social Media Point of Print Low Price

Product Endorsement Claims Comments Purchase Media Assurance
Placement Display Ads
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
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
free to target an industry they know well and add more firms to the list. For example, in automobiles the list has Kia, Porsche,
Rolls-Royce, and Toyota. We want to expand the student’s thinking beyond Ford and GM as they consider firms in this
industry. The following is our placement of the listed firms into the Generic Business strategy grid, with a few firms using
value innovation strategy.
6
Ann Taylor Broad Differentiation C.F. Martin & Co. Narrow Differentiation
BIC Narrow Cost Leadership McKinsey & Co. Narrow Differentiation
Big Lots Broad Cost Leadership Netflix Broad Differentiation
Black & Decker Broad Cost Leadership Nike Broad Differentiation
Clif Bar Narrow Differentiation Patek Philippe Narrow Differentiation
Coca-Cola Broad Differentiation Porsche Broad Differentiation
Dollar stores Broad Cost Leadership Rhapsody Narrow Cost Leadership
Ferrari Narrow Differentiation Rolls-Royce 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
Hyundai Broad Cost Leadership Target Value Innovation
Kia Motors Broad Cost Leadership Toyota Value Innovation
Land’s End Broad Differentiation Vanguard Group Narrow Cost Leadership
Liberty Mutual Broad Differentiation Victoria’s Secret Narrow Differentiation
LVMH Narrow Differentiation Zara Value Innovation
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
expend a large amount of their investments on advertisements; while other differentiators have large R&D budgets. These are
key activities for a differentiator that a cost leader, such as a dollar store or Greyhound would not undertake. Cost-leadership
firms, such as Big Lots, are likely to be more focused on supply chain management, than a differentiator, like Ferrari.
AACSB 2015 Standard 9 Analytical thinking (be able to analyze and frame problems)
6.2 Differentiation Strategy: Understanding Value

Drivers LO 6-2

In this video in slide 70 Michael Porter describes the differentiation 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.
7
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
customer service. Managers must be able to identify unmet customer needs and find ways to satisfy them or exceed customer
expectations. Firm C in Exhibit 6.3 is typically the case, as driving higher value will often increase cost. As long as the value
gap is increased (value increases MORE than cost), the differentiation will benefit the firm.
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
picked up their cars after the repair, they found their Lexus had been detailed and the gas tank filled. If owners lived far from
a Lexus dealership, the company flew mechanics to the customer’s location. In less than three weeks, Lexus was able to
resolve the recall problems on all its 8,000 LS400 vehicles sold in the United States. By exceeding customer expectations,
Lexus managers turned a serious threat into an opportunity and established the brand’s reputation for superior customer
service. Only two years after its launch, Lexus was ranked first on vehicle quality and customer satisfaction by J.D. Power
and Associates, a leading information-services firm. In the same year (1991), Lexus became the top-selling luxury brand in
the United States.
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.
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.
8
POWERPOINT SLIDE 17
Nestlé’s Nespresso single-serve coffee pods offer an example that links generic strategies from this chapter and business
models from Chapter 5. The firm differentiates using the value drivers of brand and quality. It believes that the quality of its
coffee is superior to that of the coffee available from other firms to fit its machines. It also believes its business model of only
selling direct to customers creates intimate knowledge of the customer that ultimately improves customer service. Others
might argue that its business model is a negative value driver because it does not provide the customer with the immediacy
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
EXTENDED DISCUSSION
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
Walmart and traditional grocers have large organic food sections. The Wall Street Journal 2/14/13 video discusses Whole
Foods’ challenge in adjusting their strategy to cope with increased competition in organic foods.
What value drivers are Whole Foods using to remain differentiated in the face of Walmart and other competitors
now selling organic foods? Whole Foods is refocusing on healthy eating by introducing educational elements into its
stores. Cooking classes, wellness clubs, and other special demonstrations are being created to provide additional
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
smarter in how they manage the cost side of the business. Expanding into private labels, for example, doesn’t mean those
private brands will be competing price-wise with traditional grocers. It seems to mean they are giving their customers some
additional choices. Whole Foods will have to keep a check on their “value gap” (V-C) to be sure they are not drifting into a
“stuck in the middle” situation.
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
similar to Costco with an eye toward supplying fresh foods to schools and large employer cafeterias. This increases the
economy of scope by adding another outlet for food products. It may be considered an innovative way to get more healthy
food out to large institutional customers that provide meals to kids or employees while at the same time building a revenue
stream rather than just donating salad bar equipment to schools. AACSB 2015 Standard 9 Application of knowledge and
Framing problems and developing creative solutions
9
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.
6.3 Cost-Leadership Strategy: Understanding Value

Drivers LO 6-3

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
Caribbean Cruises is betting on economies of scale. It launched its Oasis class $1.4B luxury cruise ships, the Allure of the
Seas and Oasis of the Seas—the world’s largest at 20 stories above the sea and stretching more than four football fields. The
Oasis of the Seas can accommodate more than 5,400 passengers. Will it allow Royal Caribbean to capture economies of
scale, or will it prove too large, leading to diseconomies of scale?
POWERPOINT SLIDE 26
The example of W. L. Gore for diseconomies of scale comes from the very readable book The Tipping Point by Malcolm
Gladwell. In the book, Gladwell goes on to discuss a Dunbar Number, which is named after a UK scholar (Robin Dunbar).
He argues that humans have cognitive limits at around 150 friends. Gore has expanded the idea into effective work group size
limits due to excess bureaucracy and management that slows down decision making as the group size grows.
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).
10
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
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
explain why this is happening using economies of scale and learning. They should be able to identify much higher throughput
through Amazon’s fulfillment centers than through any individual store. They may also point out that consumers do their
own product selection and checkout in Internet commerce, raising the level of sales per employee at Amazon.
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
example to reinforce the idea that cost leaders do not have to be price leaders, they just have the capability to do so. Remind
students that Chapter 5 emphasized the importance of profit to competitive advantage; thus, growing market share does not
imply a competitive advantage, if there is no operating profit. Then lead a discussion on whether students think that Xiaomi’s
business strategy is sustainable for the long term. If not, how might they tweak the strategy to increase profitability without
alienating customers? Would this strategy be effective outside of China? AACSB 2015 Standard 9 Managing in a global
context

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?
11
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
tend to be quite different for a differentiated firm than a cost-focused business. Intel would want to focus on retaining its
employee base since the learning curves and experience curves in both design and manufacture of its product is significant.
They undergo a thorough recruitment and hiring screening process to try to bring the right skill sets into the firm. Intel also
commits major funding into training, including educational support for advanced degrees, and they encourage a sabbatical
leave for employees with many years of service.
END OF CHAPTER SMALL GROUP EXERCISE 2

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.
The traditional European airlines do not have a cost structure to compete with Ryanair. U.S. airline attempts to lower cost
structures (such as Delta’s Song or Continental Lite) were a dismal failure. Therefore, the competitors should compete
against Ryanair on differentiated service and acknowledge some ultra-low price routes will be difficult to grow in share. At
the same time, the competitors, however, should be sure that consumers are comparing “fully loaded” costs rather than
comparing an $8 seat on Ryanair with a $150 seat on Aer Lingus. The competition should not be shy about posting
comparable rates for Ryanair and their own prices (with fees included). Many customers will make different decisions if the
actual travel costs are $87 for Ryanair versus $165 for Aer Lingus.
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
customer service. They do not have any issues with being “stuck in the middle” as they are firmly focused on cutting all costs
and charging additional fees for what minimal services that they do offer. Both airlines run point-to-point routes and neither
interlines baggage.
12
6.4 Business-Level Strategy and the Five Forces:

Benefits and Risks LO 6-4
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.
Students will differ on whether this is ethical, but it is a practice that smaller firms such as Method should be prepared to
address. (In the case of Method, they are highly differentiated in their products and target customers and are unlikely to be
significantly affected by such a price move.) AACSB 2015 Standard 9 Ethical understanding and reasoning (able to identify
ethical issues and address the issues in a socially responsible manner)
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
competitive disadvantage. A firm’s business strategy determines which strategic position it aspires to along the productivity
frontier. Strategic positions can—and need to—change as the external environment changes with shifts in the five forces and
macroenvironment. Changes in the industry environment allow firms to stake out more valuable positions and turn inferior
performance into a competitive advantage. By the same token, as industries change, once-leading companies that held
strategic positions along the productivity frontier may fall behind.
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.
Using superior hardware and software integration capabilities in
combination with excellent marketing, Apple turned a
commodity into a differentiated product. Consumers paid a
premium price for a superior user experience. Consumer
preferences had moved to value-added features such as seamless
integration of PCs with mobile devices that left the other
competitors (HP, Lenovo, and Dell) behind the productivity
frontier. Apple’s successful serial innovations in mobile devices
combined with the iTunes Store drove up demand for Apple’s
Macs because consumers wanted one central hub to manage all
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
13
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
nor low cost, ending up with strategic positions below the productivity frontier. Dell’s strategic position as cost leader
appeared no longer as valuable as in the early 2000s, because one of the key competitive success factors became
differentiation. Dell fell behind the productivity frontier as market demand shifted to more value-added features which Dell
could not offer.
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
difficulties in changing its strategic position, moving from a well-executed cost-leadership strategy toward more of a blue
ocean, but without the substantial and cumulative R&D investment of its rivals. Lenovo was able to carve out the clearest
strategic profile. It executed well on its strategic decision to focus on the higher end of the market by providing laptops and
desktops with outstanding performance. Lenovo moved to the productivity frontier, occupying the position of a clear
differentiator. Demand for PCs was in free-fall during this time period, and all competitors—except Lenovo—lost significant
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

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
manage internal value chain activities that are fundamentally different from one another. For example, a cost leader would
focus research and development on process technologies in order to improve efficiency, but a differentiator would focus
research and development on product technologies in order to add uniqueness.
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
competitive advantage is the relative difference in economic value creation in comparison to industry rivals. The goal of a
blue ocean strategy is therefore to achieve a larger economic value created than that of rivals pursuing a differentiation or
low-cost-leadership strategy. To illustrate this point, compare three retail chains: Nordstrom, Target, and Walmart.
Nordstrom is a differentiator; Walmart is a cost leader; Target has a blue ocean strategy. Nordstrom is an upscale retailer
pursuing a differentiation strategy by focusing on a superior customer experience in a luxury department store setting. Target
has been able to effectively compete with Nordstrom mostly by achieving a much lower-cost position, while offering an
14
acceptable shopping experience when compared with Nordstrom. On the other hand, Target has been able to compete with
Walmart by building similar skills in efficient logistics. Target almost achieves cost parity with Walmart. At the same time,
Target outdoes Walmart in product selection, merchandising, and store layout so that its stores offer a higher-quality
shopping experience for the customer. Target creates significantly more value in the minds of customers than does Walmart
with its no-frills approach. If Target is successful with its blue ocean strategy, it achieves the highest economic value.
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
manufacturing and information technology have made feasible mass customization—the manufacture of a large variety of
customized products or services done at a relatively low unit cost. In the car industry, Toyota was the first to introduce lean
manufacturing, allowing it to mass customize vehicles and produce higher quality at a lower per-unit cost. Other companies
are able to conquer this trade-off by using the Internet. You can design your own T-shirts at threadless.com or create
customized sneakers at nike.com.
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
with advanced materials such as carbon fiber. Leopard Cycles describes how it addresses the trade-off between value and cost
as follows: “Being the low-cost producer is mutually exclusive with exotic materials; however, we’re a firm believer that you
don’t have to be the most expensive to be the best.” This position implies that an integration of low cost and product
differentiation enables companies to increase the perceived value of their products, while keeping the cost increase in check.
Leopard Cycles prices its customized road-race bikes between $1,500 and $2,500, much less than what one would have paid
for such a specialized bicycle just a few years before.
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.
Electrolux, the world’s number 2 appliance manufacturer, entered China with a cost-leadership strategy. What they learned
was that they did not have the operating cost structure or the scale to compete effectively with the Chinese domestic
manufacturers as a cost leader. They closed most of their Chinese manufacturing capacity in 2013 and formulated a strategy
to change to a differentiated position with imported products. Ask students to estimate the locations for both strategies on the
productivity frontier. Electrolux plans increases in R&D from 2 percent of sales to 3 percent of sales. What other steps will
they need to take to be successful as a differentiator in China? (See “Wash, rinse, rebrand: Electrolux spiffs up appliances in
China” The Wall Street Journal 9/20/13.) AACSB 2015 Standard 9 Managing in a global context
Toyota introduced lean manufacturing to resolve the trade-off between quality and cost. This process innovation allowed
Toyota to produce higher-quality cars at a lower unit cost, and to perfect the mass customization of cars. Lean manufacturing,
over time, has become a necessary but not sufficient condition for competitive advantage in the auto industry. Today, if a
carmaker can’t produce high-quality, mass-customized cars at low cost, it is not even in the game. More recently, Toyota
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
is transitory. It is a difficult quest to gain competitive advantage; it is even more difficult to sustain it. The tools of strategic
15
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
learned in Chapter 4 that intangible resources were often in the minds of customers, such as brand value, brand awareness,
and brand personality, or in the minds of employees, such as creative ideas, firm culture, and customer service processes. A
radical strategy change, such as that undertaken at JCPenney, runs the risk of destroying those perceived intangible resources.
Brand perceptions, in this case, had to be completely altered in the minds of existing customers instantly while at the same
time making them like the new perception better than competitors they understand better. Alternatively, the firm would have
had to acquire a whole new set of customers, who would have had to been drawn away from competitors (with whom they
were presumably satisfied) without price inducements.
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.
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
16

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
the gap is reduced and can’t figure a way to either increase value or decrease cost to enlarge it again, the business should
choose which generic strategy to implement (differentiated or cost leader) and cease trying the blue ocean approach.
Additional or improved features or services need to be able to be produced at a cost less than their perceived value.
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
sustainably; it increasingly acquires raw materials and energy from sustainable sources; it strives to have a positive impact
upon the communities in which it does business. All three of these sustainability platforms are closely tied to the firm’s
vision and values (Chapter 2). Its value innovation strategy, however, is highly dependent upon reducing costs and weight in
their products, as well as long-term access to adequate supplies of wood and other materials.
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.
17
6.5 Blue Ocean Strategy: Combining Differe ntiation

and Cost Leadership LO 6-6
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.
Primark is the cost leader in the UK among clothing retail stores. Ask students to develop a strategy canvas to show whether
there is a unique place for Primark to carve out a competitive advantage in the U.S. market (see “Primark throws its hat into
U.S. ring” S Chaudhuri 9/9/15 The Wall Street Journal).
If you used the Whole Foods discussion questions earlier in this guide, ask students to use a strategy canvas to compare
Whole Foods to the Trader Joe’s example in Section 6.2.
Implications for Strategists


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.
Have the students review Chapter 4 to answer this question. In general, cost-leader firms will focus on primary activities and
making them the most efficient. Differentiated firms will focus on secondary activities and providing improved customer
service, while value innovation firms will choose a combination of these activities to strategically extend value while holding
or reducing costs.
1 Mark Lehrer Strategy Weekly Review email 10/20/15 The Wall Street Journal
18
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
the table entitled “Competitive Positioning and the Five Forces: Benefits and Risks of Cost Leadership and
Differentiation” in Exhibit 6.7, identify the factors causing P&G’s business strategy to lose its luster. Why is
P&G’s differentiation strategy no longer as potent as it once was?
In the macroenvironment, P&G experienced a powerful impact from the recession, which surprised them somewhat
because detergent had typically been a somewhat “recession-proof” industry. They saw a shift in consumer behavior
with an increased willingness to sacrifice products with P&G’s intangible resources of reliability, superior product
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
incremental innovation that P&G has achieved in the past and media spending may further erode the price premium that
the firm’s products attract due to brand reputation and superior product performance. Thus, they seem to be headed
toward a “stuck in the middle” position. They could keep their higher prices and increase couponing, thus targeting
price savings to their most price sensitive consumers, but that encourages the “only buy when it is on sale” pattern that
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?
Students may point out that a differentiation strategy for a product that is distributed through mass market retailers must
be supported by a strong pattern of continuous innovation (you cannot differentiate on service through that channel).
Other students may point out that the price differential between the high and low ends of this market are unsustainable,
suggesting that P&G needs to be very aggressive on cost reductions. Recently P&G has announced a decision to sell a
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
19
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
Hispanic segment and promoting the films on Univision. However, students are likely to come up with more ideas, such as
serving some Hispanic foods in the theaters and promotional tie-ins with popular telenovelas or Latino literature. AACSB
2015 Standard 9 Application of knowledge (able to translate knowledge of business and management into practice)
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
varying degrees of success.
Tiffany can be thought of as a classic differentiator using value drivers including product quality, innovation, and brand
reputation to command premium pricing in the marketplace. But even Tiffany has a lower price category in its silver jewelry.
Tiffany has resisted price reductions on silver jewelry to be competitive and perhaps new product innovation has fallen
behind. What do you think Tiffany should do to restore growth? (See “Tiffany looks for new silver-linings playbook” The
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
their firm. Then ask them to develop a marketing message for their firm in the form of a Facebook page, a video “celebrity”
endorsement, a podcast radio ad, or a flip chart “billboard.” Ask the class to vote on which business/product they would
visit/buy most often. Some retail industries you might use: yogurt shops, coffee shops, gyms, hotels, or spas. Some consumer
products you might use: shampoo, frozen pizzas, or salad dressings. AACSB 2015 Standard 9 Integrating knowledge across
fields and Application of knowledge (able to translate knowledge of business and management into practice)
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?
Differentiation or cost focus can often be determined from a close examination of the annual report. All firms will talk about
costs, but a differentiated firm will also highlight how it views its products (service) to be different from the competition. The
students can review the Value Drivers section of the text for some thoughts on the basis of the differentiation.
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
students will be tempted to take the easier-to-find price differential as a signal on costs, but due to profitability levels this can
be misleading, particularly over a short time frame (such as one year). Be sure to help the students focus on costs found in the
financial section of the annual report of many industry websites.
20
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
IKEA is primarily appealing to college-aged consumers and young families just starting out, and has a more narrow approach
than other retailers such as Ashley Furniture or La-Z-Boy.
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.
This answer makes sure the students can apply the concepts of this chapter to their focal firm. You may want to direct
students to look at Exhibit 6.9 on the value and cost drivers if they are still unsure at this point how to categorize the business
unit or firm.
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?
The section on the relationship to the five forces benefits and risks is likely to be helpful with the student thinking through
this question.
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.
At this point, it is important to emphasize for the students the importance of taking the time to select axes that are meaningful
in the context of competition and competitive advantage within the industry.
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
firm and make some suggestions for how the firm could improve its position either now or, thinking of the dynamics of
competitive position, how it might change in the future. AACSB 2015 Standard 9 Analytical thinking (able to analyze and
frame problems) and Making sound decisions and exercising good judgment under uncertainty
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.
21
myStrategy
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
generations. You may find that millennials on average are more likely to “work to live” than “live to work”. Gen Xers on
average may find a high pressure/high reward environment more attractive. A number of students may suggest that they
would prefer a small firm or an entrepreneurial start-up to a 50,000 person firm, no matter what pressure level is involved.
22
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the darkness. This poor soldier watched, unable to turn or speak as
the lanterns grew near. At last the light flashed in his face, and the
surgeon, with kindly face, bent over him, hesitated a moment, shook
his head, and was gone, leaving the poor fellow alone with death. He
watched in patient agony as they went on from one part of the field
to another. As they came back the surgeon bent over him again. “I
believe if this poor fellow lives to sundown to-morrow he will get
well.” And again leaving him, not to death but with hope; all night
long these words fell into his heart as the dews fell from the stars
upon his lips, “if he but lives till sundown, he will get well.” He turned
his weary head to the east and watched for the coming sun. At last
the stars went out, the east trembled with radiance, and the sun,
slowly lifting above the horizon, tinged his pallid face with flame. He
watched it inch by inch as it climbed slowly up the heavens. He
thought of life, its hopes and ambitions, its sweetness and its
raptures, and he fortified his soul against despair until the sun had
reached high noon. It sloped down its slow descent, and his life was
ebbing away and his heart was faltering, and he needed stronger
stimulants to make him stand the struggle until the end of the day
had come. He thought of his far-off home, the blessed house resting
in tranquil peace with the roses climbing to its door, and the trees
whispering to its windows, and dozing in the sunshine, the orchard
and the little brook running like a silver thread through the forest.
“If I live till sundown I will see it again. I will walk down the shady
lane: I will open the battered gate, and the mocking-bird shall call to
me from the orchard, and I will drink again at the old mossy spring.”
And he thought of the wife who had come from the neighboring
farmhouse and put her hand shyly in his, and brought sweetness to
his life and light to his home.
“If I live till sundown I shall look once more into her deep and
loving eyes and press her brown head once more to my aching
breast.”
And he thought of the old father, patient in prayer, bending lower
and lower every day under his load of sorrow and old age.
“If I but live till sundown I shall see him again and wind my strong
arm about his feeble body, and his hands shall rest upon my head
while the unspeakable healing of his blessing falls into my heart.”
And he thought of the little children that clambered on his knees
and tangled their little hands into his heart-strings, making to him
such music as the world shall not equal or heaven surpass.
“If I live till sundown they shall again find my parched lips with their
warm mouths, and their little fingers shall run once more over my
face.”
And he then thought of his old mother, who gathered these
children about her and breathed her old heart afresh in their
brightness and attuned her old lips anew to their prattle, that she
might live till her big boy came home.
“If I live till sundown I will see her again, and I will rest my head at
my old place on her knees, and weep away all memory of this
desolate night.” And the Son of God, who had died for men, bending
from the stars, put the hand that had been nailed to the cross on
ebbing life and held on the staunch until the sun went down and the
stars came out, and shone down in the brave man’s heart and
blurred in his glistening eyes, and the lanterns of the surgeons came
and he was taken from death to life.
The world is a battle-field strewn with the wrecks of government
and institutions, of theories and of faiths that have gone down in the
ravage of years. On this field lies the South, sown with her problems.
Upon the field swings the lanterns of God. Amid the carnage walks
the Great Physician. Over the South he bends. “If ye but live until to-
morrow’s sundown ye shall endure, my countrymen.” Let us for her
sake turn our faces to the east and watch as the soldier watched for
the coming sun. Let us staunch her wounds and hold steadfast. The
sun mounts the skies. As it descends to us, minister to her and stand
constant at her side for the sake of our children, and of generations
unborn that shall suffer if she fails. And when the sun has gone down
and the day of her probation has ended, and the stars have rallied
her heart, the lanterns shall be swung over the field and the Great
Physician shall lead her up, from trouble into content, from suffering
into peace, from death to life. Let every man here pledge himself in
this high and ardent hour, as I pledge myself and the boy that shall
follow me; every man himself and his son, hand to hand and heart to
heart, that in death and earnest loyalty, in patient painstaking and
care, he shall watch her interest, advance her fortune, defend her
fame and guard her honor as long as life shall last. Every man in the
sound of my voice, under the deeper consecration he offers to the
Union, will consecrate himself to the South. Have no ambition but to
be first at her feet and last at her service. No hope but, after a long
life of devotion, to sink to sleep in her bosom, and as a little child
sleeps at his mother’s breast and rests untroubled in the light of her
smile.
With such consecrated service, what could we not accomplish;
what riches we should gather for her; what glory and prosperity we
should render to the Union; what blessings we should gather unto
the universal harvest of humanity. As I think of it, a vision of
surpassing beauty unfolds to my eyes. I see a South, the home of
fifty millions of people, who rise up every day to call from blessed
cities, vast hives of industry and of thrift; her country-sides the
treasures from which their resources are drawn; her streams vocal
with whirring spindles; her valleys tranquil in the white and gold of
the harvest; her mountains showering down the music of bells, as
her slow-moving flocks and herds go forth from their folds; her rulers
honest and her people loving, and her homes happy and their
hearthstones bright, and their waters still, and their pastures green,
and her conscience clear; her wealth diffused and poor-houses
empty, her churches earnest and all creeds lost in the gospel. Peace
and sobriety walking hand in hand through her borders; honor in her
homes; uprightness in her midst; plenty in her fields; straight and
simple faith in the hearts of her sons and daughters; her two races
walking together in peace and contentment; sunshine everywhere
and all the time, and night falling on her generally as from the wings
of the unseen dove.
All this, my country, and more can we do for you. As I look the
vision grows, the splendor deepens, the horizon falls back, the skies
open their everlasting gates, and the glory of the Almighty God
streams through as He looks down on His people who have given
themselves unto Him and leads them from one triumph to another
until they have reached a glory unspeaking, and the whirling stars,
as in their courses through Arcturus they run to the milky way, shall
not look down on a better people or happier land.
AT THE AUGUSTA EXPOSITION.
I N November, 1887, at the Augusta Exposition, Mr. Grady

delivered the following Address:
“When my eyes for the last time behold the sun in the heavens, may
they rest upon the glorious ensign of this republic, still full high advanced,
its arms and trophies streaming in original lustre, not a star obscured or a
stripe effaced, but everywhere blazing in characters of living light all over
its ample folds as they wave over land and sea, and in every wind under
heaven, that sentiment dear to every American heart, liberty and union
now and forever, one and inseparable!”
These words of Daniel Webster, whose brain was the temple of

wisdom and whose soul the temple of liberty, inspire my heart as I
speak to you to-day.
Ladies and gentlemen: This day is auspicious. Set apart by
governor and president for universal thanksgiving, our grateful hearts
confirm the consecration. Though we have not been permitted to
parade our democratic roosters in jubilant print, we may now lead
them from their innocuous desuetude, and making them the basis of
this day’s feast, gather about them a company that in cordial grace
shall be excelled by none—not even that which invests the
republican turkey, whose steaming thighs shall be slipped to-day in
Indianapolis, and attacking them with an appetite that comes from
abounding health, consign them to that digestion that waits on a
conscience void of offense.
We give thanks to-day that the Lord God Almighty, having led us
from desolation into plenty, from poverty into substance, from
passion into reason, and from estrangement into love—having
brought the harvests from the ashes, and raised us homes from our
ruins, and touched our scarred land all over with beauty and with
peace—permits us to assemble here to-day and rejoice amid the
garnered heaps of our treasure. Your visitors give thanks because,
coming to a city that from deep disaster has risen with energy and
courage unequaled, and witnessing an exposition that in the sweep
of its mighty arms and the splendor of its gathered riches surpasses
all we have attempted, they find all sense of rivalry blotted out in
wondering admiration, and from hearts that know not envy or
criticism, bid you God-speed to even higher achievement, and to full
and swift harvesting of the prosperity to gain which you have builded
so bravely and so wisely.
I am thankful, if you will pardon this personal digression, because I
now meet face to face, and can render service to a people whose
generous words on a late occasion touched my heart more deeply
than I shall attempt here to express. I simply say to you now, and I
would that my voice could reach every man in Georgia to whom I am
in like indebted, that your kindness left no room for resentment or
regret; but a heart filled with gratitude and love steadier in its
resolution to deserve the approval you so unstintingly gave, and
more deeply consecrated to the service of the people, that in giving
me their love have given all that I have dared to hope for, and more
than I had dared to ask. I know not what the future may hold for the
life that recent events have jostled from its accustomed path. It
would be affectation to say that I am careless—for, in touching it with
your loving confidence, you have kindled inspirations that cherished
without guile, may be confessed in frankness. But if it be given to
man to read the human heart, and plumb the quicksands of human
ambition, I know that I speak the truth when I say that if ever I hold in
my grasp any honor, in the winning or wearing of which my State is
disadvantaged, and my hand refuses to surrender it, I pray God that
in remembrance of this hour He will strike it from me forever; and if
my ambitious heart rebels, that He will lead it, even through sorrow
and humiliation, to know that unworthy laurels will fade on the brow,
and that no honor can ennoble, no triumph advance, and no victory
satisfy that is not won and worn in the weal of the people and the
prosperity of the State.
It gives us pleasure to meet to-day our neighbors from Carolina,
and by the banks of this river, more bond than boundary, give them
cordial welcome to Georgia. The people of these States, sir, are
ancient and honorable friends. When the infant colony that settled
Georgia landed from its long voyage it was the hands of Carolinians
that helped them ashore, and Carolina’s hospitality that gave them
food and shelter. A banquet was served at Beaufort, the details of
which proved our ancestors to have been doughty trenchermen, and
at which we are not surprised to learn a goodly quantity of most
excellent wine was served, nor to learn—for scribes extenuated then
as now—that, though the affair was conducted in the most agreeable
manner, no one became intoxicated. When the Georgians took up
their march to Savannah they carried with them herds from the
Carolinians’ folds, and food from their granaries, and an offer from
Mr. Whitaker—blessed be his memory!—of a silver spoon for the first
male child born on Georgia soil, the first instance, I believe, of a
bounty offered or protection guaranteed to an infant industry on this
continent. When they settled, it was Carolina gentlemen with their
servants that builded the huts and sheltered them, and Carolina
captains with their picket men that guarded them from the Indians.
As from your slender and pitiful store you gave then bountifully to us,
we invite you to-day to share with us our plenty and rejoice with us
that what you planted in neighborly kindness hath grown into such
greatness.
I am stirred with the profoundest emotion when I reflect upon what
the peoples of these two States have endured together. Shoulder to
shoulder they have fought through two revolutions. Side by side they
have fallen on the field of battle, and, brothers even in death, have
rested in common graves. Hand clasped in hand, they enjoyed
victory together, and together reaped in honor and dignity the fruits
of their triumph. Heart locked in heart, they have stood undaunted in
the desolation of defeat and, fortified by unfailing comradeship, have
wrought gladness and peace from the tumult and bitterness of
despair. Of them it may be truly said, they have known no rivalry
save that emulation which inspires each, and embitters neither. If we
match your Calhoun, one of that trinity that hath most been and shall
not be equaled in political record, with our Stephens, who was as
acute in expounding, and as devoted in defending the constitution as
he; your Hayne, who maintained himself valiantly against the great
mastodon in American politics, with our Hill (would that he might be
given back to us to-day), who took the ablest debater of the age by
the throat and shook him until his eager tongue was stilled and the
lips that had slandered the South were livid in shame and confusion;
if against McDuffie, eloquent and immortal tribune, we put our
Toombs, the Mirabeau of his day, surpassing the Frenchman in
eloquence, and stainless of his crimes; if against Legare, both
scholar and statesman, we put our Wilde, not surpassed as either; if
we proffer Lanier, Barick and Harris, when the praises of Sims, and
Hayne, and Timrod are sung, it is only because we rejoice in the
strength of each which has honored both, and glorified our great
republic. Let the glory of our past history incite us to the future; let
the trials we have endured nerve us for trials yet to come, and let
Georgia and Carolina, that in prosperity united, in adversity have not
been divided, strike hands here to-day in a new compact that shall
hold them bound together in comradeship and love as long as the
Savannah, laying its lips on the cheeks of either, runs down to the
sea.
The South is now confronted by two dangers.
First, that by remaining solid it will force a permanent sectional
alignment, under which being in minority it has nothing to gain, and
everything to lose.
Second, that by dividing it will debauch its political system, destroy
the defenses of its social integrity, and put the balance of power in
the hands of an ignorant and dangerous class.
Let us discuss these dangers for a moment.
As to the first. I do not doubt that every day the South remains
solid, the drift toward a solid North is deepening. The South is solid
now in a sense not dreamed of in ante-bellum days. Then we divided
on every question save one, that of preserving equal representation
in the Senate. Clay championed the protective tariff. Jackson flew at
Calhoun’s throat when Carolina threatened to nullify. Polk, of
Tennessee, was made president over Clay, of Kentucky. In 1852,
Pierce received the vote of twenty-seven States out of thirty-one,
though this period marked the height of slavery disturbance. The
South was solid then on one thing alone. On all other questions
national suffrage knew no sectional lines. To-day the South is a
mass of States merged into one; every issue fused in the ardor of
one great question, and our 153 electoral votes hurled as a rifle-ball
into the electoral college. The tendency of this must be to solidify the
North. Indeed, this is already being done. Seymour and Blair, in
1868, on a platform declaring the amendments null and void, were
beaten in the North by Grant, the hero of the war, by less than
100,000 votes. Mr. Harrison, twenty years later, beat Cleveland with
a flawless record and a careful platform, over 450,000 votes in the
northern States. The solid South invites the solid North. From this
status the South has little to hope. The North is already in the
majority. More than five million immigrants have poured into her
States in the past ten years, and will be declared in the next census.
Four new States will give her eight new senators and twelve
electoral votes. In the South but one State has kept pace with the
West—and that one, Texas, has largely gained at the expense of the
Atlantic States. The South had thirty-eight per cent. of the electoral
vote in 1880. It is doubtful if she will have over twenty-five per cent.
in 1890. To remain solid, therefore, is to incur the danger of being
placed in perpetual minority, and practically shut out from
participation in the government, into which Georgia and
Massachusetts came as equals—that was fashioned in their
common wisdom, defended in their common blood, and bought of
their common treasure.
But what of the other danger? Can we risk that to avoid the first? I
am sure we cannot. The very worst thing that could happen to the
South is to have her white vote divided into factions, and each
faction bidding for the negro who holds the balance of power. What
is this negro vote? In every southern State it is considerable, and I
fear it is increasing. It is alien, being separated by racial differences
that are deep and permanent. It is ignorant—easily deluded or
betrayed. It is impulsive—lashed by a word into violence. It is
purchasable, having the incentive of poverty and cupidity, and the
restraint of neither pride nor conviction. It can never be merged
through logical or orderly currents into either of two parties, if two
should present themselves. We cannot be rid of it. There it is, a vast
mass of impulsive, ignorant and purchasable votes. With no factions
between which to swing it has no play or dislocation; but thrown from
one faction to another it is the loosed cannon on the storm-tossed
ship. There is no community that would deliberately tempt this
danger; no social or political fabric that could stand its strain. The
Tweed ring, backed by a similar and less irresponsible following than
a shrewd clique could rally and control in every southern State, and
daring less of plunder and insolence than that following would
sanction or support, blotted out party lines in New York, and made its
intelligence and integrity as solid as the South ever was. Party lines
were promptly recast because New York had to deal with the vicious,
who once punished may be trusted to sulk in quiet while their
wounds heal. We deal with the ignorant, that scourged from power
to-day, may be deluded to-morrow into assaulting the very position
from which they have been lashed. Never did robbers find followers
more to their mind than the emancipated slaves of reconstruction
days. Ignorant and confiding, they could be committed to any
excess, led to any outrage. Deep as was the degradation to which
these sovereign States were carried, and heavy as is the burden
they left on this impoverished people, it was only when the white
race, rallying from the graves of its dead and the ashes of its homes,
closed its decimated ranks, and fronting federal bayonets, and
defying federal power, stood like a stone wall before the uttermost
temples of its liberty and credit, and the hideous drama closed, that
the miserable assault was checked.
Shall those ranks be broken while the danger still threatens?
Let the whites divide, what happens? Here is this dangerous and
alien influence that holds the balance of power. It cannot be won by
argument, for it is without information, understanding or traditions—
hence without convictions. It must be bought by race privileges
granted as such, or by money paid outright. Let us follow this in its
twofold aspect. One faction gives the negro certain privileges and
wins. The other offers more. The first bids under, and so the
sickening work goes on until the barriers that now protect the social
integrity and peace of both races are swept away. The negro gains
nothing, for he secures these spoils and privileges not by deserving
them, or qualifying himself for them, but as the plunder of an irritating
struggle in which he loses that largeness of sympathy and tolerance
that is at last essential to his well-being and advancement. The other
aspect is as bad. One side puts up five thousand dollars for the
purchase of the negro vote and wins. The other, declining at first to
corrupt the suffrage, but realizing at last that the administration on
which his life and property depends is at stake, doubles this, and so
the debauching deepens until at last such enormous sums are spent
that they must be recouped from the public treasuries. Good men
disgusted go to the rear. The shrewd and unscrupulous are put to
the front, and the negro, carrying with him the balance of power, falls
at last into the grasp of the faction which is most cunning and
conscienceless. National parties, finding here their cheapest market
and widest field, will pour millions into the South, adding to the
corruption funds of municipal and State factions until the ballot-box
will be hopelessly debauched, all the approaches thereto corrupt,
and all the results therefrom tainted.
I understand perfectly that this is not the largest view of this
question to take. The larger interests of this section and of the Union
do not rest here. I deplore this fact. I would that the South, fettered
by no circumstances and embarrassed by no problem, could take
her place by the side of her sister States, making alliance as her
interest or patriotism suggested.
Let me say here that I yield to no man in my love for this Union. I
was taught from my cradle to love it, and my father, loving it to the
last, nevertheless gave his life for Georgia when she asked it at his
hands. Loving the Union as he did, yet would I do unto Georgia even
as he did. I said once in New York, and I repeat it here, honoring his
memory as I do nothing on this earth, I still thank God that the
American conflict was adjudged by higher wisdom than his or mine,
that the honest purposes of the South were crossed, her brave
armies beaten, and the American Union saved from the storm of war.
I love this Union because I am an American citizen. I love it because
it stands in the light while other nations are groping in the dark. I love
it because here, in this republic of a homogeneous people, must be
worked out the great problems that perplex the world and
established the axioms that must uplift and regenerate humanity. I
love it because it is my country, and my State stood by when its flag
was once unfurled, and uplifted her stainless sword, and pledged
“her life, her property and her sacred honor,” and when the last star
glittered from the silken folds, and with her precious blood wrote her
loyalty in its crimson bars. I love it, because I know that its flag,
fluttering from the misty heights of the future, followed by a devoted
people once estranged and thereby closer bound, shall blaze out the
way, and make clear the path up which all the nations of the earth
shall come in God’s appointed time.
I know the ideal status is that every State should vote without
regard to sectional lines. The reconciliation of the people will never
be complete until Iowa and Georgia, Texas and Massachusetts may
stand side by side without surprise. I would to God that status could
be reached! If any man can define a path on which the whites of the
South, though divided, can walk in honor and peace, I shall take that
path, though I walk down it alone—for at the end of that path, and
nowhere else, lies the full emancipation of my section and the full
restoration of this Union.
But it cannot be. When the negro was enfranchised, the South
was condemned to solidity as surely as self-preservation is the first
law of nature. A State here or there may drift away, but it will come
back assuredly—and come through such travail, and bearing such
burden, as neither war nor pestilence can bring. This problem is not
of our seeking. It was thrust upon us not in the orderly unfolding of a
preordained plan, but in hot impulse and passion, against the
judgment of the world and the lessons of history, and to the peril of
popular government, which rests at last on a pure and unsullied
suffrage as a building rests on its cornerstone. If it be urged that it
was the inexorable result of our course in 1860, we reply that we
took that course in deliberation, maintained it in sincerity, sealed it
with the blood of our best and bravest—and we accept without
complaint, and abide in dignity, its direct and ultimate results, and
shall hold it to be, in spite of defeat, forever honorable and sacred.
This much I add. No king that ever sat on a throne, though backed
by autocratic power, would have dared to subject his kingdom to the
strain, and his people to the burden that the North put on the
prostrate, impoverished, and helpless South when it enfranchised
the body of our late slaves. We would not undo this if we could. We
know that this step, though taken in haste, shall never be retraced.
Posterity will judge of the wisdom and patriotism in which it was
ordered, and the order and equity in which it was worked out.
To that judgment we appeal with confidence. From that judgment
Mr. Blaine has already appealed by shrewdly urging in his written
history, that the North did not intend to enfranchise the negro, but
was forced to do it by the stubborn attitude of the South. Be that as it
may, it is our problem now, and with resolute hands and unfailing
hearts we must carry it to the end. It dominates, and will dominate,
all other issues with us. Political spoils are not to be considered. The
administration of our affairs is secondary, and patronage is less.
Economic issues are as naught, and even great moral reforms must
wait on the settlement of this question. To quarrel over other issues
while this is impending is to imitate the mother quail that thrums the
leaves afar from her nest, or recall the finesse of the Spartan boy
who smiled in his mother’s face while he hid the fox that was
gnawing at his vitals.
What then is the duty of the South? Simply this. To maintain the
political as well as the social integrity of her white race, and to
appeal to the world for patience and justice. Let us show that it is not
sectional prejudice, but a sectional problem that keeps us
compacted; that it is not the hope of dominion or power, but an
abiding necessity—not spoils or patronage, but plain self-
preservation that holds the white race together in the South. Let us
make this so plain that a community anywhere, searching its own
heart, would say: “The necessity that binds our brothers in the South
would bind us as closely were the necessity here.” Let us invite
immigrants and meet them with such cordial welcome that they will
abide with us in brotherhood, and so enlarge the body of intelligence
and integrity, that divided it may carry the burden of ignorance
without danger. Let us be loyal to the Union, and not only loyal but
loving. Let the republic know that in peace it hath nowhere better
citizens, nor in war braver soldiers, than in these States. Though set
apart by this problem which God permits to rest upon us, and which
therefore is right, let us garner our sheaves gladly into the harvest of
the Union, and find joy in our work and progress, because it makes
broader the glory and deeper the majesty of this republic that is
cemented with our blood. Let us love the flag that waved over Marion
and Jasper, that waves over us, and which when we are gathered to
our fathers shall be a guarantee of liberty and prosperity to our
children, and our children’s children, and know that what we do in
honor shall deepen, and what we do in dishonor shall dim, the luster
of its fixed and glittering stars.
As for the negro, let us impress upon him what he already knows,
that his best friends are the people among whom he lives, whose
interests are one with his, and whose prosperity depends on his
perfect contentment. Let us give him his uttermost rights, and
measure out justice to him in that fullness the strong should always
give to the weak. Let us educate him that he may be a better, a
broader, and more enlightened man. Let us lead him in steadfast
ways of citizenship, that he may not longer be the sport of the
thoughtless, and the prey of the unscrupulous. Let us inspire him to
follow the example of the worthy and upright of his race, who may be
found in every community, and who increase steadily in numbers
and influence. Let us strike hands with him as friends—and as in
slavery we led him to heights which his race in Africa had never
reached, so in freedom let us lead him to a prosperity of which his
friends in the North have not dreamed. Let us make him know that
he, depending more than any other on the protection and bounty of
government, shall find in alliance with the best elements of the
whites the pledge of safe and impartial administration. And let us
remember this—that whatever wrong we put on him shall return to
punish us. Whatever we take from him in violence, that is unworthy
and shall not endure. What we steal from him in fraud, that is worse.
But what we win from him in sympathy and affection, what we gain in
his confiding alliance and confirm in his awakening judgment, that is
precious and shall endure—and out of it shall come healing and
peace.
What is the attitude of the North on this issue? Two propositions
appear to be universally declared by the Republicans. First, that the
negro vote of the South is suppressed by violence, or miscounted by
fraud. Second, that it shall be freely cast and fairly counted. While
Republicans agree on these declarations, there are those who hold
them sincerely, but would be glad to see the first disapproved, and
the second thereby wiped out—and those who hold them in
malignity, and who will maintain the first that they may justify the
storm that lies hid in the second.
Let us send to-day a few words to the fair-minded Republicans of
the North. Here is a fundamental assertion—the negroes of the
South can never be kept in antagonism with their white neighbors—
for the intimacy and friendliness of the relation forbids. This
friendliness, the most important factor of the problem—the saving
factor now as always—the North has never, and it appears will
never, take account of. It explains that otherwise inexplicable thing—
the fidelity and loyalty of the negro during the war to the women and
children left in his care. Had Uncle Tom’s Cabin portrayed the habit
rather than the exception of slavery, the return of the Confederate
armies could not have stayed the horrors of arson and murder their
departure would have invited. Instead of that, witness the miracle of
the slave in loyalty closing the fetters about his own limbs—
maintaining the families of those who fought against his freedom—
and at night on the far-off battle-field searching among the carnage
for his young master, that he might lift the dying head to his humble
breast and with rough hands wipe the blood away, and bend his
tender ear to catch the last words for the old ones at home, wrestling
meanwhile in agony and love, that in vicarious sacrifice he would
have laid down his life in his master’s stead. This friendliness, thank
God, has survived the lapse of years, the interruption of factions, and
the violence of campaigns, in which the bayonet fortified, and the
drum-beat inspired. Though unsuspected in slavery, it explains the
miracle of ’64—though not yet confessed, it must explain the miracle
of 1888.
Can a Northern man dealing with casual servants, querulous,
sensitive, and lodged for a day in a sphere they resent, understand
the close relations of the races of the South? Can he comprehend
the open-hearted, sympathetic negro, contented in his place, full of
gossip and comradeship, the companion of the hunt, the frolic, the
furrow, and the home, standing in kindly dependence that is the habit
of his blood, and lifting not his eyes beyond the narrow horizon that
shuts him in with his neighbors? This relation may be interrupted, but
permanent estrangement can never come between these two races.
It is upon this that the South depends. By fair dealing and by
sympathy to deepen this friendship and add thereto the moral effect
of the better elements compacted, with the wealth and intelligence
and influence lodged therein—it is this upon which the South has
relied for years, and upon which she will rest in future.
Against this no outside power can prevail. That there has been
violence is admitted. There has also been brutality in the North. But I
do not believe there was a negro voter in the South kept away from
the polls by fear of violence in the late election. I believe there were
fewer votes miscounted in the South than in the North. Even in those
localities where violence once occurred, wiser counsels have
prevailed, and reliance is placed on those higher and legitimate and
inexorable methods by which the superior race always dominates,
and by which intelligence and integrity always resist the domination
of ignorance and corruption. If the honest Republicans of the North
permit a scheme of federal supervision, based on the assumption of
intimidated voters and a false count, they will blunder from the start,
for, beginning in error, they will end in worse. This whole matter
should be left now with the people, with whom it must be left at last—
that people most interested in its honorable settlement. External
pressure but irritates and delays. The South has voluntarily laid
down the certainty of power which dividing her States would bring,
that she might solve this problem in the deliberation and the
calmness it demands. She turns away from spoils, knowing that to
struggle for them would bring irritation to endanger greater things.
She postpones reforms and surrenders economic convictions, that
unembarrassed she may deal with this great issue. And she pledges
her sacred honor—by all that she has won, and all that she has
suffered—that she will settle this problem in such full and exact
justice as the finite mind can measure, or finite hands administer. On
this pledge she asks the patience and waiting judgment of the world,
and especially of the people—her brothers and her kindred—that in
passion forced this problem into the keeping of her helpless hands.
Shall she have it?
Let us see. Was there a pistol shot through the South on election
day? Was there a riot? Was there anything to equal the disturbance
and arrests in President Harrison’s own city? If so, diligent search
has not found it. Where then was the vote suppressed through
violence? In the 12,000 election precincts of the South, where was a
ballot-box rifled, or a registry list altered? Thirteen Republican
congressmen were elected, many of them by majorities so slender
that the vote of a single precinct would have changed the result. In
West Virginia, with its wild and lawless districts, the governorship
hangs on less than three hundred votes, and this very day the
governor of Tennessee and his cabinet are passing on a legal
question in the casting of twenty-three votes that elects or defeats a
congressman. In West Virginia and in Tennessee the law will be
applied as impartially and the official vote held as sacred as in New
York or Ohio. Where, then, is the wholesale fraud of which complaint
is made?
In the face of this showing, let me quote from an editorial in the
Chicago Tribune, one of the most powerful and a usually
conservative journal, charging that the negro vote is suppressed and
miscounted. It says:
“The trouble is, the blacks will not fight for themselves. White men, or
Indians, situated as the negroes, would have made the rivers of the
South run red with blood before they would submit to the usurpations and
wrongs with which the black passively endure. Oppressed by generations
of slavery, the negroes are non-combatants. They will not shoot and burn
for their rights.”
Mark the unspeakable infamy of this suggestion. The “trouble” is
that the negroes will not rise and shoot and burn. Not the “mercy” is
that they do not—but the “mercy” is that they will not massacre and
begin the strife that would repeat the horrors of Hayti in the various
States of this Republic. Burn and shoot for what? That they may vote
in Georgia, where in front of me in the line stood a negro, whose
place was as sacred as mine, and whose vote as safely counted?
That they may vote in the thirteen districts in which they have elected
their congressmen?—in the 320 counties in which they have elected
their representatives, and in old Virginia, where they came within
1400 votes of carrying the State?
As the 60,000 Virginia negroes who did vote did so in admitted
peace and safety, where was the violence that prevented the needed
1400 from leaving their fields, coming to the ballot-box, and giving
the State to the Republicans? And yet slavery itself, in which the
selling of a child from its mother’s arms and a wife from her husband
was permitted, never brought into reputable print so villainous a
suggestion as this, leveled by a knave at a political condition which
he views from afar, and which it is proved does not exist. To pass by
the man who wrote these words, how shall we judge the temper of a
community in which they are applauded? Are these men blood of our
blood that they permit such things to go unchallenged? Better that
they had refused us parole at Appomattox and had confiscated the
ruins of our homes, than twenty years later to bring us under the
dominion of such passion as this. Hear another witness, General
Sherman, not in hot speech but in cold print:
“The negro must be allowed to vote, and his vote must be counted,
otherwise, so sure as there is a God in heaven, you will have another
war, more cruel than the last, when the torch and dagger will take the
place of the muskets of well-ordered battalions. Should the negro strike
that blow, in seeming justice, there will be millions to assist them.”
And this is the greatest living soldier of the Union army. He

covered the desolation he sowed in city and country through these
States with the maxim that “cruelty in war, is mercy”—and no one
lifted the cloak. But when he insults the men he conquered, and
endangers the renewing growth of the country he wasted, with this
unmanly threat, he puts a stain on his name the maxims of
philosophy and fable from Socrates all the way cannot cover, and the
glory of Marlborough, were it added to his own, could not efface.
No answer can be made in passion to these men. If the temper of
the North is expressed in their words, the South can do nothing but
rally her sons for their last defense and await in silence what the
future may bring forth. This much should be said: The negro can
never be established in dominion over the white race of the South.
The sword of Grant and the bayonets of his army could not maintain
them in the supremacy they had won from the helplessness of our
people. No sword drawn by mortal man, no army martialed by mortal
hand, can replace them in the supremacy from which they were cast
down by our people, for the Lord God Almighty decreed otherwise
when he created these races, and the flaming sword of his archangel
will enforce his decree and work out his plan of unchangeable
wisdom.
I do not believe the people of the North will be committed to a
violent policy. I believe in the good faith and fair play of the American
people. These noisy insects of the hour will perish with the heat that
warmed them into life, and when their pestilent cries have ceased,
the great clock of the Republic will strike the slow-moving and
tranquil hours, and the watchmen from the streets will cry, “All’s well
—all’s well!” I thank God that through the mists of passion that
already cloud our northern horizon comes the clear, strong voice of
President Harrison declaring that the South shall not suffer, but shall
prosper, in his election. Happy will it be for us—happy for this
country, and happy for his name and fame, if he has the courage to
withstand the demagogues who clamor for our crucifixion, and the
wisdom to establish a path in which voters of all parties and of all
sections may walk together in peace and prosperity.
Should the President yield to the demands of the pestilent, the
country will appeal from his decision. In Indiana and New York more
than two million votes were cast. By less than 16,000 majority these
States were given to Harrison, and his election thereby secured. A

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