Business Strategy:

Differentiation, Cost
Leadership, and Blue
Oceans
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 CHICKEN NUGGETS GROUP

Gwendelle Alac Rizza Pamotongan Hannah Myka Faith Orais Trisha Jane Vallestero Husna Simbao
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 Learning Objectives:

1 2 3
Define business-level Examine the relationship Examine the relationship
strategy and describe how it between value drivers and between cost drivers and
determines a firm’s strategic differentiation strategy the cost-leadership strategy
position

4 5 6
Assess the benefits and
Evaluate value and cost Assess the risks of a blue
risks of differentiation and
drivers that may allow a ocean strategy, and
cost-leadership strategies
firm to pursue a blue explain why it is difficult
vis-à-vis the five forces that
ocean strategy to succeed at value
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shape competition
innovation
 What is
The goal-directed actions managers
business take in their quest for competitive
level advantage when competing in a single
strategy? product market
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 “How should we compete?”
• Who: which customer segments?
• What: customer needs will we satisfy?
• Why: do we want to satisfy them?
• How: will we satisfy our customers’ needs?
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 Exhibit Industry and Firm effects Jointly Determine
6.1 Competitive Advantage
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 Strategic position
Profile based on value creation and cost
• In a specific product market

A valuable and unique position, which:

 Meets customer needs
 At the highest possible product value
 For the lowest possible product cost
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 Strategic trade-offs
Choices between a cost or value position
Tension between:
o Value creation and
o Pressure to keep cost in check

Purpose to maximize the firm’s:

● Economic value creation
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● Profit margin
 Generic business strategies
Differentiation strategy Cost leadership strategy
o Seeks to create higher value vs. o Seeks to create similar value vs.
competitors competitors
o Offers unique features o Charges lower prices
o Charges higher prices
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 Scope of competition

The size-narrow or broad of the market in

which a firm chooses to compete
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 Strategic position
and competitive
scope: generic
business strategy
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 Differentiation strategy
Unique features that increase value
• Consumers pay higher price
The focus of competition:
o Unique product features
o Service
o New product launches
o Marketing and promotion
Competitive advantage achieved when:
• Value – cost > competitors
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 Differentiation Strategy: Achieving Competitive
Advantage
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 Economies of scale and scope
Economies of scale
Decreases in cost per unit
Achieved as output increases

Economies of scope

Producing two outputs at less cost

Shares resources or technology
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 Three drivers that increase perceived value

1 2 3
Product features
Customer service Complements
o Enables
differentiation
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 Differentiation strategies: summary
Focused on adding value
o Unique features
o Customer service
o Effective marketing
Can increase costs
● R&D/innovation needed
Customers willing to pay a premium
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 Goal:
Cost Reduce cost below competitors
Leadership Offer adequate value
Strategy Reduce prices for customers
Optimize the value chain for low
cost
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 Cost Leadership Strategy: Achieving Competitive Advantage
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 Cost drivers that keep costs low

Cost of input factors

Learning-curve effects
Raw materials, capital,
Less to produce output
labor, and IT services
with experience

Economies of scale Experience-curve effects

Decreases in cost per unit
as output increases Improvements to technology and
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production processes
 Economies of scale
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 Economies and diseconomies of scale
Economies of scale: Diseconomies of scale:
o Spreads fixed costs over a larger output o Firms too big
o Employs specialized systems and o Complexities of too much coordination
equipment o Inflexible and slow
o Takes advantage of certain physical
properties
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 Gaining Competitive Advantage Through Learning
Curve And Experience Curve Effects
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 Cost leadership strategies: summary

Focus on:
o Offering lower costs than competitors
o Maintaining acceptable quality
Appeals to the bargain-conscious buyer
o Attracts an increased sales
Can be profitable over a long period of time
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 Business-Level Strategy and the Five Forces: Benefits and Risks
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 What is Blue Ocean Strategy is all about?

 A business level strategy that  Blue oceans represent untapped

successfully combines
differentiation and cost leadership
activities using value innovation to
reconcile the inherent trade-offs.
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market space, the creation of
additional demand, and the
resulting opportunities for highly
profitable growth.
 Red ocean: all existing
industries, or known market Basic
space; concepts

Blue ocean: industries that do

not yet exist, spaces that are not
known and not yet destroyed by
competition.
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 Value innovation
 The simultaneous pursuit of differentiation and low cost in a way
that creates a leap in value for both the firm and consumers;
considered a cornerstone of blue ocean strategy.
 Successful value innovation requires that a firm’s strategic moves
lower its cost and at the same time increase the perceived value of
the buyers.
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 In terms of achieving successful ERRC Framework
value innovation, note that the first
two questions (Eliminate and
Reduce) focus on lowering costs,
while the other two questions (Raise
and Create) focus on increasing
perceived consumer benefits.
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 BLUE OCEAN STRATEGY GONE BAD:
“STUCK IN THE MIDDLE”
A blue ocean strategy is difficult to implement because it requires the
reconciliation of fundamentally different strategic positions—
differentiation and low cost—which in turn require distinct internal
value chain activities so the firm can increase value and lower cost at the
same time.
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 Blue Ocean Strategy vs. Stuck in the Middle
(Strategic position)

This exhibit shows the

consequence of a blue ocean
strategy gone bad—the firm ends
up being stuck in the middle,
meaning the firm has neither a
clear differentiation nor a clear
cost-leadership profile.
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Thank you!
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