Business Level

Strategy
Ijaz Ahmed

Strategy
Concerned with making choices among two or more

alternatives
The choices are influenced by
opportunities and threats
nature and quality of the resources, capabilities, and core

competencies

Strategies are purposeful,

precede the taking of actions to which they apply,
demonstrate a shared understanding of the firms vision and

mission.

Acers decisions to acquire Gateway and Packard Bell were

quite purposeful.
Acquiring Gateway helped the firm establish a better foothold in

Business-Level Strategy
(Defined)
An integrated and coordinated set of

commitments and actions the firm uses to

gain a competitive advantage by exploiting
core competencies in specific product
markets.

Core strategy, Every firm has one, how it

intends to compete

Reach, Richness,
Affiliation
Reach
The reach dimension of relationships with customers is

concerned with the firms access and connection to

customers

Richness
Richness, the second dimension of firms relationships

with customers, is concerned with the depth and detail

of the two-way flow of information between the firm
and the customer.

Affiliation
the third dimension, is concerned with facilitating

Customers: Their
Relationship to BusinessLevel Strategies
Who will be
served?

Key Issues
in
Business-level
Strategy

What needs will

be satisfied?

How will those

needs be satisfied?

Who: Determining the

Customers to Serve
Market segmentation
A process used to cluster people with similar
needs into individual and identifiable groups.

All Customers
Consumer
Markets

Industrial
Markets

Market Segmentation
Consumer Markets
Demographic factors
Socioeconomic

factors

Industrial Markets
End-use segments
Product segments

Geographic factors

Geographic segments

Psychological factors

Common buying

Consumption

patterns
Perceptual factors

factor segments
Customer size

segments

Market Segmentation
Consumer Markets
Demographic factors (age, income, sex, etc.)
Socioeconomic factors (social class, stage in the
family life cycle)
Geographic factors (cultural, regional, and
national differences)
Psychological factors (lifestyle, personality traits)
Consumption patterns (heavy, moderate, and light
users)
Perceptual factors (consumer perceptions

Market Segmentation
Industrial Markets
End use segment (Standardized Industrial
Classification Code) (High speed and low speed
motors)
Geographic segments (defined by boundaries
between countries or by regional differences
within them)
Common buying factor segments
Five factors are typically found to be important in
most industrial buying situations: product
performance, productquality, service, delivery,
andprice.

What: Determining
Which Customer
Needs to Satisfy
Customer needs are related to a products

benefits and features.

Customer needs are neither right nor wrong,

good nor bad.

Customer needs represent desires in terms of

features and performance capabilities.

How: Determining Core

Competencies Necessary
to Satisfy Customer
Needs
Firms use core competencies to implement

value creating strategies that satisfy

customers needs.
Only firms with capacity to continuously

improve, innovate and upgrade their

competencies can expect to meet and/or
exceed customer expectations across time.

The Purpose of a BusinessLevel Strategy

Business-Level Strategies
Are intended to create differences between

the firms position relative to those of its rivals.

To position itself, the firm must decide

whether it intends to:

Perform activities differently or
Perform different activities as compared to

rivals.

Types of Potential
Competitive Advantage
Achieving lower overall costs than rivals
Performing activities differently (reducing

process costs)

Possessing the capability to differentiate the

firms product or service and command a

premium price
Performing different (more highly valued)

activities.

Types of Business-Level
Strategies
Competitive Advantage

Broad
Target

Competitive
Scope
Narrow
Target

Cost

Uniqueness

Cost Leadership

Differentiation

Integrated Cost
Leadership/
Differentiation
Focused Cost
Leadership

Focused
Differentiation

 Firms serving a broad target market seek to

use their competitive advantage on an

industry-wide basis.
A narrow competitive scope means that the

firm intends to serve the needs of a narrow

target customer group.
With focus strategies, the firm selects a

segment or group of segments in the industry

and tailors its strategy to serving them to the
exclusion of others.
Buyers with special needs and buyers located in

Cost Leadership Strategy

An integrated set of actions taken to produce

goods or services with features that are

acceptable to customers at the lowest cost,
relative to that of competitors
Relatively standardized products
Features acceptable to many customers
Lowest competitive price

Process innovations
newly designed production and distribution methods
and techniques that allow the firm to operate more
efficiently, are critical to successful use of the cost
leadership strategy
Cost leaders goods and services must have

competitive levels of differentiation that create

value for customers while maintaining low cost
KIA motors
Cost cutting could lead to limited potential for all-

important process innovations, employment of

lower-skilled workers, poor conditions on the
production line, accidents, and a poor quality of

Research suggests that having a competitive

advantage in terms of logistics creates more

value when using the cost leadership strategy
than when using the differentiation strategy.

Big Lotss
Sell name-brand products at prices that are

20 to 40 percent below those of discount

retailers and roughly 70 percent below those
of traditional retailers.
Big Lotss buyers search for manufacturer

overruns and discontinued styles to find

goods priced well below wholesale prices.
Buys from overseas suppliers.
Big Lots satisfies the customers need to

access the differentiated features of brandname products, but at a fraction of their initial

Cost Leadership Strategy

Cost saving actions required by this strategy:
Building efficient scale facilities
Tightly controlling production costs and

overhead
Minimizing costs of sales, R&D and service
Building efficient manufacturing facilities
Monitoring costs of activities provided by

outsiders
Simplifying production processes

How to Obtain a Cost

Advantage
Determine
and control
Cost
Drivers

Reconfigur
e Value
Chain if
needed

Alter production process

Change in automation

New raw material

Forward integration

New distribution channel

New advertising media
Direct sales in place
of indirect sales

Backward integration
Change location
relative to suppliers
or buyers

Examples of Value-Creating Activities

Associated with the Cost Leadership Strategy

Cost Leadership Strategy:

Competitors
Rivalry with
Existing
Competitors
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargainin
g power
of
suppliers
Bargaining
power of
buyers

Due to cost leaders

advantageous position:
Rivals hesitate to

compete on basis of
price.
Lack of price competition

leads to greater profits.

Cost Leadership Strategy:

Buyers
Bargaining Power
of Buyers

Threat of
substitute
products

power by:
Driving prices far

Threat of
new
entrants
Rivalry
among
competing
firms

Can mitigate buyers

Bargainin
g power
of
suppliers
Bargaining
power of
buyers

below competitors,
causing them to exit,
thus shifting power
with buyers back to
the firm.

Cost Leadership Strategy:

Suppliers
Bargaining Power
of Suppliers

Threat of
substitute
products

suppliers power by:

Being able to absorb

Threat of
new
entrants
Rivalry
among
competing
firms

Can mitigate

Bargainin
g power
of
suppliers
Bargaining
power of
buyers

cost increases due to

low cost position.
Being able to make

very large purchases,

reducing chance of
supplier using power.

Cost Leadership Strategy:

New Entrants Can frighten off new
The Threat of
Potential Entrants
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

entrants due to:

Their need to enter on

a large scale in order to

be cost competitive.
The time it takes to

Bargainin
g power
of
suppliers
Bargaining
power of
buyers

move down the

learning curve.
Efficiency

Cost Leadership Strategy:

Substitutes
Product
Substitutes

Cost leader is well

positioned to:
Make investments to be

first to create
substitutes.

Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargainin
g power
of
suppliers
Bargaining
power of
buyers

Buy patents developed

by potential substitutes.
Lower prices in order to

maintain value position.

More customers

Cost Leadership Strategy

(contd)
Competitive Risks
Processes used to produce and distribute good

or service may become obsolete due to

competitors innovations.
Too much focus by the cost leader on cost
reductions may occur at the expense of trying
to understand customers perceptions of
competitive levels of differentiation.
Wal-Mart, for example, has been criticized for having too few

salespeople available to help customers and too few individuals at

checkout registers. These complaints suggest that there might be a
discrepancy between how Wal-Marts customers define minimal
levels of service and the firms attempts to drive its costs lower and
lower.

Competitors, using their own core

Differentiation Strategy
An integrated set of actions taken to produce

goods or services (at an acceptable cost) that

customers perceive as being different in ways
that are important to them.
Focus is on nonstandardized products
Appropriate when customers value

differentiated features more than they value

low cost.

When the firm has a thorough understanding of

what its target customers value
the relative importance they attach to the
satisfaction of different needs
for what they are willing to pay a premium,

the differentiation strategy can be effective in

helping it earn above-average returns
A good or service can be differentiated in many

ways.
Unusual features
responsive customer service
rapid product innovations and technological

leadership

How to Obtain a
Differentiation Advantage
Control
Cost
Drivers

if
needed

Reconfigu
re Value
Chain to
maximize

Raise performance of product or service

Create sustainability through:
Customer perceptions of uniqueness
Customer reluctance to switch to
non-unique product or service

Figure 4.4

Examples of Value-Creating Activities Associated

with the Differentiation Strategy

Differentiation Strategy:
Competitors
Rivalry with
Competitors
Defends against
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargainin
g power
of
suppliers
Bargaining
power of
buyers

competitors because
brand loyalty to
differentiated product
offsets price competition.

Differentiation Strategy:
Buyers
Bargaining Power
Can mitigate buyers
of Buyers
power because well
differentiated products
Threat of
reduce customer
new
entrants
sensitivity to price
Rivalry
Bargainin
among
increases.
g power

competing
firms

Threat of
substitute
products

of
suppliers
Bargaining
power of
buyers

Differentiation Strategy:
Suppliers
Bargaining Power
of Suppliers

Threat of
substitute
products

power by:
Absorbing price increases

Threat of
new
entrants
Rivalry
among
competing
firms

Can mitigate suppliers

due to higher margins.

Bargainin
g power
of
suppliers

Bargaining
power of
buyers

Passing along higher

supplier prices because

buyers are loyal to
differentiated brand.

Differentiation Strategy:
New Entrants
The Threat of
Potential Entrants
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Can defend against new

Bargainin
g power
of
suppliers

Bargaining
power of
buyers

entrants because:
New products must surpass

proven products.
New products must be at

least equal to performance

of proven products, but
offered at lower prices.

Differentiation Strategy:
Substitutes
Product
Substitutes
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargainin
g power
of
suppliers
Bargaining
power of
buyers

Well positioned relative

to substitutes because:
Brand loyalty to a

differentiated product
tends to reduce
customers testing of new
products or switching
brands.

Competitive Risks of
Differentiation
The price differential between the differentiators product

and the cost leaders product becomes too large.

Differentiation ceases to provide value for which customers

are willing to pay.

A differentiated product becomes less valuable if

imitation by rivals causes customers to perceive that

competitors offer essentially the same good or service,
but at a lower price
Experience narrows customers perceptions of the value of

differentiated features.
customers having positive experiences with generic tissues may

decide that the differentiated features of the Kleenex product

are not worth the extra cost.
Customer may be impressed with the quality of a Robert Talbott

Best of Class tie, positive experiences with less expensive ties

may lead to a conclusion that the price of the Best of Class tie

Competitive Risks of
Differentiation
Counterfeit goods
Counterfeit goods replicate differentiated features

of the firms products.

Counterfeits are those products bearing a

trademark that is identical to or indistinguishable

from a trademark registered to another party, thus
infringing the rights of the older of the trademark

Focus Strategies
An integrated set of actions taken to produce

goods or services that serve the needs of a

particular competitive segment.
Particular buyer groupyouths or senior

citizens
Different segment of a product lineproducts

for professional painters versus do-it-yourself

group
Different geographic markets Sindh vs Punjab

Focus Strategies (contd)

Focused cost leadership strategy(IKEA)
Design low-cost, modular furniture ready for assembly by
customer
To eliminate the need for sales associates or decorators,
IKEA positions the products in its stores so that customers
can view different living combinations (complete with
sofas, chairs, tables, etc.) in a single room like setting,
which helps the customer imagine how a grouping of
furniture will look in the home.
A third practice that helps keep IKEAs costs low is
requiring customers to transport their own purchases
rather than providing delivery service.
IKEA also offers some differentiated features
unique furniture designs, in-store playrooms for children,
wheelchairs for customer use, and extended hours.

Focus Strategies (contd)

Focused differentiation strategy
Kazoo Toys reading

To implement a focus strategy, firms must be able

to:
Complete various primary and support activities in a

competitively superior manner, in order to develop

and sustain a competitive advantage and earn
above-average returns.

Factors That Drive Focused

Strategies
Large firms may overlook small niches.
A firm may lack the resources needed to compete

in the broader market.

A firm is able to serve a narrow market segment

more effectively than can its larger industry-wide

competitors.
Focusing allows the firm to direct its resources to

certain value chain activities to build competitive

advantage.

Competitive Risks of Focus

Strategies
A focusing firm may be out-focused by its

competitors.
A large competitor may set its sights on a firms

niche market.
Customer preferences in niche market may

change to more closely resemble those of the

broader market. Cameras.

Integrated Cost
Leadership/
Differentiation Strategy
A firm that successfully uses an integrated

cost leadership/differentiation strategy should

be in a better position to:
Adapt quickly to environmental changes.
Learn new skills and technologies more quickly.
Effectively leverage its core competencies while

competing against its rivals.

Leadership/
Differentiation Strategy
(contd)
Commitment to strategic flexibility is

necessary for implementation of integrated

cost leadership/ differentiation strategy.
Flexible manufacturing systems (FMS)
Information networks
Total quality management (TQM) systems

Flexible Manufacturing
Systems
Computer-controlled processes used to

produce a variety of products in moderate,

flexible quantities with a minimum of manual
intervention.
Goal is to eliminate the low-cost-versus-wide

product-variety tradeoff.
Allows firms to produce large variety of

products at relatively low costs.

Information Networks
Link companies electronically with their

suppliers, distributors, and customers.

Facilitate efforts to satisfy customer

expectations in terms of product quality and

delivery speed.
Improve flow of work among employees in the

firm and their counterparts at suppliers and

distributors.
Customer relationship management (CRM)

Total Quality Management

(TQM) Systems
Emphasize total commitment to the customer

through continuous improvement using:

Data-driven, problem-solving approaches
Empowerment of employee groups and teams

Benefits
Increased customer satisfaction
Lower costs
Reduced time-to-market for innovative products

Exceeding customers expectations regarding

quality is a differentiating feature

And eliminating process inefficiencies to cut

costs allows the firm to offer that quality to

customers at a relatively low price.
Thus, an effective TQM system helps the firm

develop the flexibility needed to spot

opportunities to simultaneously increase
differentiation and reduce costs.

Risks of the Integrated

Cost Leadership/
Differentiation Strategy
Often involves compromises
Becoming neither the lowest cost nor the most
differentiated firm.
Becoming stuck in the middle
Lacking the strong commitment and expertise
that accompanies firms following either a cost
leadership or a differentiated strategy.