LETRAN,LIEZEL V.
BSBA-FINANCIAL MANAGEMENT
 STRATEGIC MANAGEMENT
 CHAPTER 4
KEY TERMS:
i. Business-level strategy-
is an integrated and
coordinated set of
commitmentsandactionsthe
firm uses to gain a v.
competitive advantage by
exploiting core
competencies in specific
product markets.
ii. CostleadershipStrategy-
is an integrated set of
actions taken to produce
goods or services with
features that are vi.
acceptabletocustomersat
the lowest cost, relative
to that of competitors.
iii. Differentiation Strategy-
is an integrated set of vii.
actions taken to produce
goods or services (at an
acceptable cost) that
customersperceiveasbeing
different in ways that are
important to them.
iv. Focus Strategy- is an
integrated set of actions
taken to produce goods or
services that serve the
needs of a particular
competitive segment.
Integrated cost
leadership/differentiatio
n strategy- involves
engaging in primary
value-chainactivitiesand
support functions that
allow a firm to
simultaneouslypursuelow
cost and differentiation.
Market segmentation- is a
process used to cluster
people with similar needs
into individual and
identifiable groups.
Total quality management
(TQM)- is a managerial
processthatemphasizesan
organization’s commitment
to the customer and to
continuousimprovementof
all processes through
problem-solving
approaches based on
empowerment of employees.
  REVIEW QUESTIONS:
1. What is business- level strategy?
o Business-level strategy is an integrated and
coordinatedset of commitmentsand actionsthefirm
uses to gain a competitive advantage by exploiting
core competencies in specific product markets. It
indicatesthechoicesthefirmhasmade abouthowit
intends to compete in individual product markets.
Namely,thechoicesareimportantbecauselong-term
performance islinkedtoafirm’sstrategies. Given
the complexity of successfully competing in the
global economy, the choices about how the firm will
compete can be difficult.

Moreover, the purpose of a business-level strategy

istocreatedifferencesbetweenthefirm’sposition
and those of its competitors. To position itself
differently from competitors, a firm must decide
whetheritintendstoperformactivitiesdifferently
ortoperformdifferentactivities.Strategydefines
the path which provides the direction of actions to
be taken by leaders of the organization.

2. What is the relationship between a firm's customers and

itsbusiness-levelstrategyintermsofwho,what,andhow?
Why is this relationship important?
o Customers are the foundation of successful
business-levelstrategiesandshouldneverbetaken
for granted. Effectively managing customer
relationshipshelpsthefirmanswerquestionsrelated
to the issues of who, what, and how. In terms of
customers,whenselectingabusiness-levelstrategy
the firm determines who will be served, what needs
thosetargetcustomershavethatitwillsatisfy,and
how those needs will be satisfied. Moreover, firms
must satisfy customers with their business-level
strategy so that returns earned from relationships
withcustomersarethelifebloodofallorganizations.
Furthermore, the most successful companies try to
find new ways to satisfy current customers and/ or
to meet the needs of new customers.
 Deciding who the target customer is that the firm
intendstoservewithitsbusiness-levelstrategyis
an important decision. Companies divide customers
into groups based on differences in the customers’
needstomakethisdecision.Dividingcustomersinto
groups based on their needs is called market
segmentation.Marketsegmentationisaprocessused
toclusterpeoplewithsimilarneedsintoindividual
and identifiable groups.

After the firm decides who it will serve, it must

identifythetargetedcustomergroup’sneedsthatits
goods or services can satisfy. In a general sense,
needs(what)arerelatedtoaproduct’sbenefitsand
features. Successful firms learn how to deliver to
customers what they want, when they want it.

After deciding who the firm will serve and the

specific needs of those customers, the firm is
preparedtodeterminehowtouseitscapabilitiesand
competenciestodevelopproductsthatcansatisfythe
needsofitstargetcustomers.Corecompetenciesare
resourcesandcapabilitiesthatserveasasourceof
competitiveadvantageforthe firmoveritsrivals.
Firms use core competencies (how) to implement
value-creating strategies, thereby satisfying
customers’ needs.

3. What are the differences among the cost leadership,

differentiation, focused cost leadership, focused
differentiation, and integrated cost
leadership/differentiation business level strategies?
o When selecting a business-level strategy, firms
evaluatetwotypesofpotentialcompetitiveadvantages:
“lowercostthanrivalsortheabilitytodifferentiate
andcommandapremiumpricethatexceedstheextracost
ofdoingso.”Havinglowercostsresultsfromthefirm’s
abilitytoperformactivitiesdifferentlythanrivals;
being able to differentiate indicates the firm’s
capacitytoperformdifferent(andvaluable)activities.
Thus, based on the nature and quality of its internal
resources,capabilities,andcorecompetencies,afirm
 seeks to form either a cost competitive advantage or a
distinctivenesscompetitiveadvantageasthebasisfor
implementing its business-level strategy.

Moreover,therearetwotypesoftargetmarketsarebroad
market and narrow market segment(s). Firms serving a
broad market seek to use their capabilities to create
valueforcustomersonanindustry-widebasis.Anarrow
marketsegmentmeansthatfirmsintendtoservetheneeds
ofanarrowcustomergroup.Withfocusstrategies,the
firm “selects a segment or group of segments in the
industryandtailorsitsstrategytoservingthemtothe
exclusion of others.

The cost leadership strategy is an integrated set of

actionstakentoproducegoodsorserviceswithfeatures
that are acceptable to customers at the lowest cost,
relativetothatofcompetitorsinbroadmarket.Onthe
other hand, the differentiation strategy is an
integrated set of actions taken to produce goods or
services(atanacceptablecost)thatcustomersperceive
as being different in ways that are important to them
in the broad market. Thirdly, focused cost leadership
strategyisanintegratedsetofactionstakentoproduce
goodsorserviceswithfeaturesthatareacceptableto
customersatthelowestcost,similartocostleadership
strategy.However,itisusedwhenfirmsutilizetheir
core competencies to serve the needs of a particular
industry segment or niche to the exclusion of others.
Fourthly,focuseddifferentiationstrategyisatypeof
differentiationstrategywhichisusedinnarrowmarket
instead of broad market. Finally, integrated cost
leadership/differentiation strategy which involves
engaginginprimaryvalue-chainactivitiesandsupport
functionsthatallowafirmtosimultaneouslypursuelow
costanddifferentiation.Inadditiontothis,itstands
on broad and narrow market together.

4. Howcaneachofthebusiness-levelstrategiesbeusedto
positionthefirmrelativetothefiveforcesofconpetition
in a way that helps the firm earn above-average returns?
a. Cost Leadership Strategy
o Having the low-cost position is valuable when dealing
withrivals.Becauseofthecostleader’sadvantageous
position, rivals hesitate to compete on the basis of
price, especially before evaluating the potential
outcomes of such competition.

Powerfulcustomerscanforceacostleadertoreduceits
prices,butnotbelowthelevelatwhichthecostleader’s
next-most-efficient industry competitor can earn
average returns.

Thecostleadergenerallyoperateswithmarginsgreater
than those of competitors and often tries to increase
itsmarginsbydrivingcostslower.Amongotherbenefits,
higher gross margins relative to those of competitors
make it possible for the cost leader to absorb its
suppliers’ price increases. When an industry faces
substantialincreasesinthecostofitssupplies,only
thecostleadermaybeabletopaythehigherpricesand
continuetoearneitheraverageorabove-averagereturns.

Through continuous efforts to reduce costs to levels

thatarelowerthancompetitors,acostleaderbecomes
highly efficient. Because increasing levels of
efficiency enhance profit margins, they serve as a
significantentrybarriertopotentialcompetitors.New
entrants must be willing to accept less than average
returns until they gain the experience required to
approach the cost leader’s efficiency.
Comparedwithitsindustryrivals,thecostleaderalso
holds an attractive position relative to product
substitutes.

b. Differentiation Strategy
o Customers tend to be loyal purchasers of products
differentiatedinwaysthataremeaningfultothem.As
their loyalty to a brand increases, customers’
sensitivity to price increases is reduced. The
relationship between brand loyalty and price
sensitivityinsulatesafirmfromcompetitiverivalry.
Thus,reputationscansustainthecompetitiveadvantage
of firms following a differentiation strategy.
 Thedistinctivenessofdifferentiatedgoodsorservices
reduces customers’ sensitivity to price increases.
Customers are willing to accept a price increase when
aproductstillsatisfiestheiruniqueneedsbetterthan
a competitor’s offering.

Because the firm using the differentiation strategy

chargesapremiumpriceforitsproducts,suppliersmust
providehigh-qualitycomponents,drivingupthefirm’s
costs.However,thehighmarginsthefirmearnsinthese
cases partially insulate it from the influence of
suppliers in that higher supplier costs can be paid
through these margins.

Customerloyaltyandtheneedtoovercometheuniqueness
ofadifferentiatedproductcreatesubstantialbarriers
topotentialentrants.Enteringanindustryunderthese
conditionstypicallydemandssignificantinvestmentsof
resourcesandpatiencewhileseekingcustomers’loyalty.

Firms selling brand-name goods and services to loyal

customers are positioned effectively against product
substitutes. In contrast, companies without brand
loyalty face a higher probability of their customers
switchingeithertoproductswhichofferdifferentiated
featuresthatservethesamefunction(particularlyif
the substitute has a lower price) or to products that
offer more features and perform more attractive
functions.

c. Focused Cost Leadership Strategy

o Thisstrategyisusedtopositionthefirmrelativeto
the fiveforces of competition in a way that helps the
firm earn above-average returns similar to cost
leadership strategy.

d. Focused Differentiation Strategy

o Thisstrategyisusedtopositionthefirmrelativeto
the fiveforces of competition in a way that helps the
firm earn above-average returns similar to
differentiation strategy.
e. Integrated Cost Leadership/Differentiation Strategy
o Flexibility is required for firms to complete primary
value-chain activities and support functions in ways
that allow them to use the integrated cost
leadership/differentiationstrategyinordertoproduce
somewhat differentiated products at relatively low
costs. Flexible manufacturing systems, information
networks,andtotalqualitymanagementsystemsarethree
sourcesofflexibilitythatareparticularlyusefulfor
firms trying to balance the objectives of continuous
costreductionsandcontinuousenhancementstosources
of differentiation as called for by the integrated
strategy.

Using a flexible manufacturing system (FMS), the firm

integrates human, physical, and information resources
to create relatively differentiated products at
relatively low costs. A significant technological
advance,theFMSisacomputer-controlledprocessused
toproduceavarietyofproductsinmoderate,flexible
quantities with a minimum of manual intervention.

Bylinkingcompanieswiththeirsuppliers,distributors,
and customers information networks provide another
source of flexibility. These networks, when used
effectively, help the firm satisfy customer
expectations in terms of product quality and delivery
speed.

Totalqualitymanagement(TQM)isamanagerialprocess
that emphasizes an organization’s commitment to the
customerandtocontinuousimprovementofallprocesses
throughproblem-solvingapproachesbasedonempowerment
of employees. Firms develop and use TQM systems to
increase customer satisfaction, to cut costs, and to
reduce the amount of time required to introduce
innovative products to the marketplace.

5. What are the specific risk associated with using each

business-level strategy?

a. Cost Leadership Strategy

o Firstriskisthattheprocessesusedbythecostleader
 to produce and distribute its good or service could
becomeobsoletebecauseofcompetitors’innovations.A
second risk is that 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.” Imitation is a final risk
of the cost leadership strategy. Using their own core
competencies, competitors sometimes learn how to
successfully imitate the cost leader’s strategy.

b. Differentiation Strategy
o One risk of the differentiation strategy is that
customers might decide that the price differential
between the differentiator’s product and the cost
leader’s product is too large. Another risk of the
differentiation strategy is that a firm’s means of
differentiation may cease to provide value for which
customers are willing to pay. A third risk of the
differentiationstrategyisthatexperiencecannarrow
customers’ perceptions of the value of a product’s
differentiated features. Counterfeiting is the
differentiation strategy’s fourth risk. Counterfeits
areproductswhicharelabeledwithatrademarkorlogo
thatisidenticaltoorindistinguishablefromalegal
logoownedbyanotherparty,thusinfringingtherights
of the legal owner. When a consumer purchases such a
product and discovers the deception, regret creates
distrust of the branded product and reduces
differentiation.

c. Focused Cost Leadership Strategy

o FocusedCostLeadershipStrategyhasallrisksofCost
Leadership Strategy. In addition to these, first, a
competitormaybeabletofocusonamorenarrowlydefined
competitivesegmentandthereby“out-focus”thefocuser.
Second, a company competing on an industry-wide basis
may decide that the market segment served by the firm
using a focus strategy is attractive and worthy of
competitive pursuit. The third risk is that the needs
of customers within a narrow competitive segment may
becomemoresimilartothoseofindustry-widecustomers
as a whole over time. As a result, the advantages of a
focus strategy are either reduced or eliminated.
d. Focused Differentiation Strategy
o Focused Differentiation Strategy has all risks of
DifferentiationStrategy.Inadditiontothese,first,
a competitor may be able to focus on a more narrowly
definedcompetitivesegmentandthereby“out-focus”the
focuser.Second,acompanycompetingonanindustry-wide
basismaydecidethatthemarketsegmentservedbythe
firmusingafocusstrategyisattractiveandworthyof
competitive pursuit. The third risk is that the needs
of customers within a narrow competitive segment may
becomemoresimilartothoseofindustry-widecustomers
as a whole over time. As a result, the advantages of a
focus strategy are either reduced or eliminated.

e. Integrated Cost Leadership/Differentiation Strategy

o First risk is that firms find it difficult to perform
primaryvalue-chainactivitiesandsupportfunctionsin
waysthatallowthemtoproducerelativelyinexpensive
products with levels of differentiation that create
valueforthetargetcustomer.Secondly,toproperlyuse
this strategy across time, firms must be able to
simultaneously reduce costs incurred to produce
products(asrequiredbythecostleadershipstrategy)
while increasing product differentiation (as required
by the differentiation strategy). Thirdly, firms that
failtoperformthevalue-chainactivitiesandsupport
functions in an optimum manner become “stuck in the
middle.”Beingstuckinthemiddlemeansthatthefirm’s
cost structure is not low enough to allow it to
attractively price its products and that its products
arenotsufficientlydifferentiatedtocreatevaluefor
the target customer. Fourthly, firms can also become
stuck in the middle when they fail to successfully
implement either the cost leadership or the
differentiation strategy.

CASEDISCUSSIONQUESTIONS:
1. What strategy was the new CEO at JCPenney seeking to
implement given the generic strategies found in Chapter 4?
o The Strategy that JCPenney's New CEO (Ron Johnson) is
 trying to implement based is that he's trying to
implement the integrated cost leadership /
differentiationstrategyinordertoturnthetidesand
conditionoftheBusinessintotheirfavorbyusinghis
successfulpastexperienceinAppleRetailStore.Inhis
new strategies, he tried to rebrand JCPenney by
implementing the cost leadership strategy through
decreasing the price of goods around 40% instead of
offeringdiscountslikebefore,becausehe'stryingto
aimforthevaluepricingapproachwhichmostlytryto
keepthecostslowalthoughthediscountapproachisthe
mainstaple&strategyofJCPenneysincethebeginning.

Then,he'salsoimplementingadifferentiationstrategy
whichwillbeintegratedwiththecostleadershipwhere
asheshiftedthefocusofeverystoreintosellingsome
certainbrandedproductssuchasLevi’s,etcalongside
with some specific types of goods such as home goods,
etc.Heimplementedthisintegratedstrategytochange
JCPenneyintoanewhigh-endretailstoresthatprovide
goodpricesandbetterdealsontheirbrandedgoodswith
ahopethatpeoplecouldeasilyaffiliate&retainthat
imagebecauseoftheirworthinessanddifferentiation.
However,apparentlyJCPenneyisn’treallyacompanythat
peoplecaneasilyaffiliatewithlikeApple,especially
when they decided to implement that strategy because
most people will most likely remember and affiliate
JCPenneywithdiscountsinsteadofthecurrentstrategy
and if that Image is gone, people will probably just
forget about JCPenney and won’t even gonna shop in a
regular basis because of no discounts.

2. What was the result of change in strategy implemented?

o TheCEO’sfocusofthestrategywastofocusonthenew
customers, but failed to keep the current customers
happy.BecausethenewstrategycausedJCPennytolose
manyofitscurrentcustomers,healsofailedtoattract
new ones. The implemented strategy resulted in the
currentcustomerswerebeingmissedandthenewpricing
policy caused the old customers to be forgotten. The
resultchangewasa$4.28Billionlossinsalesfromthe
previous year. Their internet sales declined by 48
percent. This ultimately led to a net loss of
 approximately $1 Billion. The results of the strategy
implementedwereafailure.Mentionedtherethatthenew
CEOwantedtogainmorecustomersspecificallycustomers
from their competitors. Unfortunately, they only
focused on attracting more customers rather than
buildingmomentumintheircurrentcustomersatthesame
time gain more customers. Their sales were decreasing
whichresultedinanetlossatthesametimelosingits
customers. The aftereffect of the adjustment in
methodologyCEO,RonJohnsonexecutedisdisappointment.
Hisvisionwascenteredaroundincreasingnewclients,
yetneglectedcurrentclientandneglectedtokeepthem
upbeat.

3. Why was this strategy a disaster for JCPenney?

o WhentakingoverasCEOofJCPenny,RonJohnsondidnot
deliverabusinessstrategythatcaterstothecompany’s
existing customer base. JCPenny have operated through
promotions and discounts that mimics its competitors,
Macy’s, marketing strategy. However, when Ron Johnson
took over he adopted 1/3 of the company’s store a new
business model that focused on everyday low prices
without any additional discounts or promotions. As a
result, the company’s new market segment cannibalized
itsowncustomersbecause2/3ofitsstoreswerestill
promotion based and did not adopt the new business
strategy. Therefore, all stores that adopted the new
business strategy increased sales and the old stores
significantly decreased sales.

4.Whatdoesismeantobe"stuckinthemiddle"betweentwo
strategies(i.e between low cost and differentiation
strategies)
o Differentiation strategy is also known as a marketing
strategyinwhichnewandexclusiveproductisdeveloped
whichhassomeuniquecharacteristicswhicharevalued
by the customers these characteristics are perceived
differentanduniquefromtheproductsbeingofferedby
the competitive firms. Firms products may not be the
cheapest option, but they are somehow special or
differenttothecustomersmakingthemdesirable.Firms
musttakethetimetocarefullyunderstandtheirtarget
market because if they price these “special” products
toohigh,peoplemayoptforthecheaperoptions.Tesla
would be a good example of a company who uses this
strategy.Thiskindofmarketingstrategyisusedwhere
thereis a tough competitionin the marketandall the
firms are offering similar kinds of products and
services. The circumstances where the customers are
looking "something different" can also result in the
implementationofthisstrategy.Low-coststrategycan
beconsideredasamarketingstrategybythefirmwhen
theytrytoattractmorecustomersbyreducingtheprice
oftheirproductsandservicesasatoolforincreasing
their sales and market share.Low cost strategy is
centeredonthecapabilityofthecompanytoproduceand
deliverproductsofcompetitivequalityatlowercosts.