7. The Experience Curve
The Experience Curve
The “Law of Experience”
1994
1995
Cost per
unit of
output
The unit cost value added to a standard
product declines by a constant %
(typically 20-30%) each time cumulative
output doubles.
1996
1997
1998
Cumulative Output
1999
2000
8. Examples of Experience Curves
Examples of Experience Curves
75%
100K 200K
500K
1,000K
Accumulated unit production
(millions)
UK refrigerators, 1957-71
Price Index
50 100 200 300
1960 Yen
15K
20K 30K
Japanese clocks & watches, 1962-72
70% slope
5
10
50
Accumulated units
(millions)
9. Choices that Drive Costs
Economies of scale
Product features
Asset utilization
Performance
Capacity utilization pattern
Mix & variety of products
- Seasonal, cyclical
Interrelationships
- Order processing
and distribution
Value chain linkages
- Advertising & Sales
- Logistics & Operations
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training, motivation
10. Value Chain of Firm Activities
Firm Infrastructure
Human Resource Management
Technological Development
M
A
R
G
IN
M Service
A
R
G
IN
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
11. Value Creating Activities common to a
Inbound
Cost Leadership Business Level Strategy
Logistics
Inbound
Logistics
Support
Activities
Highly Efficient
Systems to Link
Suppliers’
Products with the
Firm’s Production
Processes
Located in Close
Proximity with
Suppliers
Primary Activities
12. Value Creating Activities common to a
Operations
Cost Leadership Business Level Strategy
Effective Training Programs
to Improve Worker
Efficiency and Effectiveness
Human Resource ManagementAsset
Timing of
Purchases
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes
Technological Development
M
A
RG
Policy Choice of
Frequent Evaluation Processes to
Procurement Plant Technology
IN
Monitor Suppliers’ Performances
Organizational
Learning
Primary Activities
R
G
IN
Products Priced to
Generate Sales
Volume
M
A
Policy Choice of Efficient Order
Plant Technology Sizes
Organizational
Small, Highly
Trained Sales
Learning
Force
Service
Outbound
Logistics
Efficient Plant
Delivery Schedule
Scale to Minimize that Reduces
Manufacturing
Costs
Costs
Selection of Low
Timing of Asset
Cost Transport
Purchases
Carriers
Operations
Inbound
Logistics
Support
Activities
Firm
Efficient Plant
Scale
Infrastructure to Minimize
Mfg. Costs
Relatively Few
Management Layers to
Reduce Overhead
13. Value Creating Activities common to a
Outbound
Cost Leadership Business Level Strategy
Logistics
Delivery Schedule
that Reduces Costs
M
Human Resource ManagementSelection of Low
A
R
Cost Transport G
Technological Development
Carriers
IN
Efficient Order
Frequent Evaluation Processes to
Procurement
Monitor Suppliers’ Performances
Sizes
Efficient Order
Sizes
Interrelationships
with Sister Units
Primary Activities
National Scale
Advertising
R
G
IN
Generate Sales
Volume
M
A
Selection of Low
Cost Transport
Carriers
Effective Product
Interrelationship
Installations to
s Reduce Frequency
with Sister
and Severity
Units
Products Priced to of Recalls
Marketing
& Sales
Service
Delivery Schedule Small, Highly
that Reduces
Trained Sales
Costs
Force
Outbound
Outbound
Logistics
Logistics
Support
Activities
Firm Infrastructure
14. Value Creating Activities common to a
Marketing
Cost Leadership Business Level Strategy
& Sales
Human Resource Management
Technological Development
Primary Activities
Small, Highly
Trained Sales Force
M
Products Priced
A
to GenerateR
Sales
G
Volume
IN
M
A
R
G
IN
National Scale
Advertising
Marketing
& Sales
Marketing
& Sales
Service
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
15. Human Resource
Effective Product
Installations to M
Management
Reduce
A
RG
Recalls
Technological Development
IN
Primary Activities
R
G
IN
M
A
Marketing
Service
& Sales
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Support
Activities
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Service
Firm Infrastructure
16. Value Creating Activities common to a
Cost Leadership Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological Development
M
A
RG
IN
Primary Activities
Frequent Evaluation
Processes to Monitor
Suppliers’ Performances
M
A
Systems and Procedures to
Find the Lowest Cost Products
to Purchase Raw Materials
R
G
IN
Procurement
Marketing
& Sales
Service
Outbound
Logistics
Inbound
Logistics
Operations
Procurement
Procurement
17. Value Creating Activities common to a
Cost Leadership Business Level Strategy
Support
Activities
Firm Infrastructure
M
A
RG
Human Resource Management
Technological Development
IN
Primary Activities
M
A
Investments in Technology in
order to Reduce Costs
Associated with Manufacturing
Processes
R
G
IN
Marketing
& Sales
Outbound
Logistics
Easy-to-Use
Manufacturing
Technologies
Operations
Inbound
Logistics
Technological Development
Service
Procurement
18. Value Creating Activities common to a
Cost Leadership Business Level Strategy
Support
Activities
Firm Infrastructure
M
A
RG
Human Resource Management
Technological Development
IN
Primary Activities
M
A
Service
Marketing
& Sales
Effective Training Programs
to Improve Worker
Efficiency and Effectiveness
Outbound
Logistics
Operations
Inbound
Logistics
Consistent Policies to
Reduce Turnover Costs
R
G
IN
Human Procurement
Resource Management
19. Value Creating Activities common to a
Cost Leadership Business Level Strategy
M
A
RG
Human Resource Management
Technological Development
Firm Infrastructure
Primary Activities
IN
R
G
IN
M
A
Service
Relatively Few
Management Layers
to Reduce Overhead
Marketing
& Sales
Simplified Planning
Procurement
Practices to Reduce
Planning Costs
Outbound
Logistics
Inbound
Logistics
Cost Effective
MIS Systems
Operations
Support
Activities
Firm Infrastructure
20. Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
Bargaining
Power of
Buyers
21. Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can frighten off New Entrants
due to the need to:
* Enter at large scale to
be Cost Competitive
* Take time to move down
the “Learning Curve”
22. Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can mitigate Buyer Power by:
* Driving prices far below competitors
may cause exit and shift power back
to firm
Bargaining
Power of
Buyers
23. Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Threat of
Substitute
Products
Threat of
New
Entrants
Well positioned relative to
Substitutes in order to:
* Make investments to create
substitutes first
* Buy patents developed by
potential substitutes
* Lower prices to maintain
value position
Bargaining
Power of
Buyers
24. Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Can mitigate Supplier Power by:
* Low cost position makes them better
able to absorb cost increases
* More likely to make very large purchases
Threat of
which reduces chance of supplier power
Substitute
Products
Bargaining
Power of
Buyers
25. Effective Cost Leaders can remain profitable
Competitors avoid
even when the Five Forces appear unattractiveCost
price wars with
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
Leaders, which
creates higher profits
for entire industry
Bargaining
Power of
Buyers
26. The Major
Risks involved
with a
Cost Leadership
Business Level
Strategy
Dramatic technological
change could take away
your cost advantage
Competitors may learn
how to imitate Value Chain
Focus on efficiency could cause
Cost Leader to overlook changes
in customer preferences
27. Generic Business Level Strategies
Source of Competitive Advantage
Cost
Breadth of
Competitive
Scope
Broad
Target
Market
Narrow
Target
Market
Uniqueness
Cost
Leadership
Differentiation
28. Differentiation Business Level Strategy
Key Criteria
Value provided by unique
features and value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation
29. Drivers of Differentiation
Some Examples:
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of
inputs
Exceptional skill or experience
Detailed information
30. Value Creating Activities common to a
Differentiation Business Level Strategy
M
A
RG
Human Resource Management
Technological Development
IN
Primary Activities
R
G
IN
M
A
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Firm Infrastructure
31. Value Creating Activities common to a
Inbound
Differentiation Business Level Strategy
Logistics
Primary Activities
IN
M
A
R
G
IN
M
A
RG
Service
Outbound
Logistics
of incoming raw
Human Resource Management
materials to
minimize damage
and improve the
Technological Development
quality of the
final product
Procurement
Inbound
Logistics
Inbound
Logistics
Operations
Support
Activities
Firm Infrastructure
Superior handling
32. Value Creating Activities common to a
Operations
Differentiation Business Level Strategy
Human Resource Management
Technological
Rapid responses to
customers
Developmentunique
manufacturing
specifications
M
A
RG
IN
Primary Activities
R
G
IN
M
A
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Operations
Support
Activities
Firm
Consistent
manufacturing of
Infrastructure
attractive products
33. Value Creating Activities common to a
Differentiation Business LevelOutbound
Strategy
Logistics
Accurate and
responsive order
Managementprocessing MA
procedures
R
Primary Activities
Rapid and timely
product deliveries
to customers
IN
R
G
IN
Outbound
Outbound
Logistics
Logistics
Procurement
G
M
A
Technological Development
Marketing
& Sales
Service
Human Resource
Inbound
Logistics
Operations
Support
Activities
Firm Infrastructure
34. Value Creating Activities common to a
Marketing
Differentiation Business Level Strategy
& Sales
Human Resource Management
Technological Development
Primary Activities
Strong
Coordination
among functions in
M
A
R&D, Marketing
R
and Product G
Development IN
Extensive personal
relationships with
buyers
Marketing
& Sales
Marketing
& Sales
Service
R
G
IN
Premium
Pricing
M
A
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Support
Activities
Firm Infrastructure
35. Human Resource
Complete field
stocking of
Management
replacement
parts
Technological Development
M
A
RG
IN
Primary Activities
R
G
IN
M
A
Marketing
Service
& Sales
Service
Outbound
Logistics
Procurement
Inbound
Logistics
Operations
Support
Activities
Value Creating Activities common to a
Differentiation Business Level Strategy
Service
Firm Infrastructure
36. Value Creating Activities common to a
Differentiation Business Level Strategy
Support
Activities
Firm Infrastructure
M
A
RG
Human Resource Management
Technological Development
IN
Purchase of highest
quality replacement
parts
Primary Activities
R
G
IN
Systems and procedures
used to find the highest
quality raw materials
Located in
Close Proximity
with Suppliers
M
A
Procurement
Marketing
& Sales
Service
Outbound
Logistics
Inbound
Logistics
Operations
Procurement
Procurement
37. Value Creating Activities common to a
Differentiation Business Level Strategy
Support
Activities
Firm Infrastructure
M
A
RG
Human Resource Management
Technological Development
IN
Procurement
Marketing
& Sales
Service
Primary Activities
Strong
capability in
basic research
R
G
IN
Investments in technologies to produce highly
differentiated products
M
A
Coordination among
R&D, marketing and
product development
Outbound
Logistics
Inbound
Logistics
Operations
Technological Development
38. Value Creating Activities common to a
Differentiation Business Level Strategy
Support
Activities
Firm Infrastructure
Human Resource Management
Technological Development
M
A
RG
IN
Human Procurement
Resource Management
Primary Activities
R
G
IN
Superior
personnel
training
M
A
Marketing
& Sales
Service
Extensive use of
subjective performance
measures
Outbound
Logistics
Inbound
Logistics
Operations
Compensation programs
which encourage worker
creativity and productivity
39. Value Creating Activities common to a
Differentiation Business Level Strategy
Human Resource Management
Technological Development
Firm Infrastructure
Primary Activities
M
A
RG
IN
R
G
IN
A companywide emphasis
on producing high quality
products
M
A
Outbound
Logistics
Inbound
Logistics
Operations
Highly developed Information
Systems to better Procurement
understand
customers’ purchasing preferences
Marketing
& Sales
Service
Support
Activities
Firm Infrastructure
40. Differentiation Business Level Strategy
Effectiveness with Differentiation grows out of
Value Chain activities
Examples:
Heineken beer
Raw materials – brand name
Steinway pianos
Raw materials & Workmanship
Mercedes Benz autos
Technology and Workmanship
Intel microprocessors
Technological superiority
Caterpillar tractors
Service buyers’ needs quickly
anywhere in the world
41. Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can fend off New Entrants
because:
* New products must
surpass proven products
* Or be equal to performance
at lower prices
42. Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Can mitigate Buyer Power because:
Well differentiated products reduce
customer sensitivity to price increases
Bargaining
Power of
Buyers
43. Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
Substitute
Products
Threat of
New
Entrants
Well positioned relative to
Substitutes because:
* Brand loyalty tends to
reduce new product trial
and brand switching
Bargaining
Power of
Suppliers
44. Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Can mitigate Supplier Power by:
* Absorbing price increases due to
higher margins
Well positioned relative to
Substitutes because:
* Passing on higher supplier prices
Threat of
Brand loyalty tends to
*
because buyers are brand loyal
Substitute
reduce new product trial
and brand switching
Products
Bargaining
Power of
Suppliers
45. Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Threat of
New
Entrants
Bargaining
Power of
Buyers
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
Can fend off New Entrants because:
Brand loyalty
New products must
surpass proven much
overcomes products
* Or be equal to performance
price competition
at lower prices
*
Bargaining
Power of
Suppliers
46. The Major
Risks involved
with a
Differentiation
Business Level
Strategy
Customers may decide
that the cost of
“uniqueness” is too great
Competitors may learn
how to imitate Value Chain
The means of uniqueness
may no longer be valued
by customers
47. Generic Business Level Strategies
Source of Competitive Advantage
Cost
Breadth of
Competitive
Scope
Uniqueness
Broad
Target
Market
Cost
Leadership
Differentiation
Narrow
Target
Market
Focused
Low Cost
Focused
Differentiation
48. Focused Business Level Strategies
Focused
Business Level
Strategies
involve the
same basic
approach as
Broad Market
Strategies
*
However.....
Opportunities may exist because:
*
Large firms may
overlook small niches
*
Firm may lack resources
to compete industry wide
May be able to serve a narrow market segment more
effectively than industry-wide competitors
49. Focused Business Level Strategies
Focused
Business Level
Strategies
involve the
same basic
approach as
Broad Market
Strategies
- Bang & Olufsen
- Snap-On tools
- IAMS
*
May be able to retrofit old
factories to keep costs down
*
Minimize R&D costs by
copying innovators
Upscale electronic components
High quality mechanics’ tools
Premium pet foods
50. Focused Business Level Strategies
Focused
Business Level
Strategies
involve the
same basic
approach as
Broad Market
Strategies
*
Focused Differentiators
may thrive by selecting a
small market that is
underserved by large
players
Custom manufacturers of parts for
Harley-Davidson
motorcycles
51. Firm may be “outfocused”
by competitors
The Major
Risks involved
with a Focused
Differentiation
Business Level
Strategy
Large competitor may
set its sights on your
niche market
Preferences of niche market
may change to match those of
broad market
53. Integrated Low Cost/Differentiation Strategy
Recognize that the Integrated Low Cost/
Differentiation business level strategy involves a
Compromise
The risk is that the firm may become “Stuck in
the Middle” lacking a strong commitment to or
expertise with either type of generic strategy
54. Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Low Cost
Use a single aircraft model
(Boeing 737)
Use secondary
airports
Fly short
routes
No meals
15 minute turnaround time
No reserved seats
No travel agent reservations
55. Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Low Cost
Use a single aircraft model
(Boeing 737)
Use secondary airports
Fly short routes
No meals
15 minute turnaround time
No reserved seats
No travel agent reservations
Differentiation
Focus on customer
satisfaction
High level of employee
dedication
New flight services for
business travelers
(Phones and faxes)