CHAPTER FIVE

BUSINESS-
LEVEL
STRATEGY
Business-Level Strategy
Definition:
 Business-level strategy: is a strategy designed
to gain competitive advantage by exploiting core
competencies in specific product market for the
purpose of providing value to customers.

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 Business-level strategy

• Business-level strategy – Key issues

Which good or
service to offer
Customers?

Business-level How to
Strategy manufacture or
create it?

How to
distribute it? 100
Business-Level Strategy cont’d …

Business-level strategic issues

 Inselecting business-level strategy, the
firm should determine:
 Who will be served? Refers to types of
customers
 What needs those target customers have
that the firm will satisfy? Refers to the
benefits & features of products
 How those needs will be satisfied? Refers to
core competencies
101
Business-Level Strategy cont’d …
Who: Determining the customers to serve
 Firms divide customers into groups
based on differences in the customers’
needs
 Customers could be broadly clustered
into:
 Consumer markets or
 Industrial markets

102
 Business-Level Strategy cont’d …
Who: Determining the Customers to Serve
Companies divide customers into groups based
on differences in the customers’ needs

Consumer Industrial
Customers
markets markets

Market segmentation
Market segmentation is used to cluster people
with similar needs into individual and
identifiable groups 103
Business-Level Strategy cont’d …
What: Determining which customer needs
to satisfy

 Needs are related to the benefits & features of a

good or service

 The basic need of all customers is to buy products

or services that create value for them
 Two main forms of value that products provide
are:
 Low cost with acceptable features
104
 Highly differentiated features with acceptable

cost
Business-Level Strategy cont’d …
How: Determining core competencies
necessary to satisfy customer needs
 Core competencies are resources &
capabilities that serve as a source of
competitive advantage for the firm over
its rivals
 How will the customer needs be
satisfied?
 By using core competencies to implement
value-creating strategies
 By continuously improving, upgrading &
innovating firm’s competencies
105
Business-Level Strategy cont’d …
Note:
 Only firms who diligently perform
these can expect to meet & hopefully
exceed customers’ expectations across
time
 The firm’s r/ship with its customers is
strengthened when it is committed to
offering them superior value
 In turn, receiving superior value
enhances customers’ loyalty to the firm
– helps to develop a new competitive
advantage
106
Business-Level Strategy cont’d …

Business-level strategy:
 Isa deliberate choice about how a
firm will perform the value chain’s
primary & support activities in ways
that create unique value
 Reflects
where & how the firm has an
advantage over its rivals
 Is intended to create differences b/n
the firm’s position relative those of
its rivals 107
Business-Level Strategy cont’d …

 Thus, the essence of a firm’s business-

level strategy is choosing to:
 Perform activities differently than rivals –
to achieve lowest cost or
 Perform different (valuable) activities –
being able to differentiate

 Hence, competitive advantage is

achieved within some scope – firms
should prefer one of the two
The Five Business - Level Competitive
Strategies cont’d …

 The five generic strategies are:

 Cost leadership
 Differentiation

 Focused cost leadership

 Focused differentiation
 Integrated cost leadership &
differentiation
12
The Five Business - Level Competitive
Strategies cont’d …

 Cost leadership: lowest cost to produce

acceptable features to all customers

 Differentiation: differentiated features

rather than low cost for customers who
value differentiation

 Focused cost leadership: refers to

targeting those specific customers with
low cost
13
The Five Business - Level Competitive
Strategies cont’d …
 Focused differentiation: refers to
targeting those specific customers with a
differentiated product (e.g., Rolls Royce
motor cars, Ferrari sport cars, Italian
shoes from natural materials & man work
ship)
 Integrated cost leadership & differentiation:
according to porter, this strategy was
referred initially as “stuck in the middle”
 Meaning, neither the lowest cost nor a
differentiated firm 14
 The Five Business - Level Competitive
Strategies cont’d …

Note:
 None of the five business-level strategies
is inherently or universally superior to
others
 The effectiveness of each strategy is
contingent both on the opportunities &
threats in a firm’s external environment &
on the possibilities provided by the firm’s
unique resources & capabilities (core
competencies)
 It is critical, therefore, for the firm to117
select an appropriate strategy in light of
its external conditions & competencies
Cost Leadership Strategy
Definition
A cost leadership strategy is an
integrated set of actions designed to
produce or deliver goods or services
at the lowest cost relative to
competitors, with features that are
acceptable to customers
 Lowest competitive price
 Features acceptable to many
customers
 Relatively standardised products 118
Cost Leadership Strategy cont’d …
 Cost saving actions required by
this strategy:
 Building efficient scale facilities
 Tightly controlling production costs and
overhead
 Simplifying production processes and
building efficient manufacturing facilities
 Minimising costs of sales and service
 Monitoring costs of activities provided by
outsiders
 Gaining a unique access to a large source
of lower cost materials.
 Making optimal outsourcing 119

 Vertical integration decisions

Cost Leadership Strategy cont’d …
Economies of Scope

 Economies of scope occur through a

firm’s ability to spread costs
associated with one element of the
value chain across multiple products,
thereby reducing costs.

 For example, Sharp achieves

economies of scope through spreading
the costs of running their distribution
networks etc across a range of 120

products.
Cost Leadership Strategy cont’d …
Accumulated Experience
 Asa person or a firm gains
experience in completing a task, they
become more efficient at doing it.
 This process can occur through:
 learning or experience
 technical progress
121
Cost Leadership Strategy and the Five
Competitive Forces

Potential entrants
 Firmcan frighten off potential
new entrants due to:
 Their need to enter on a large scale
in order to be cost competitive
 The time it takes to move down the
learning curve
122
Cost Leadership Strategy and the Five
Competitive Forces cont’d …
Bargaining power of suppliers &
buyers
 Can mitigate suppliers’ power by:
 Being able to absorb cost increases due to
low cost position
 Being able to make very large purchases,
reducing chance of suppliers using power

 Can mitigate buyers’ power by:

 Driving prices far below competitors and
causing them to exit, thus shifting the power 123
of the buyers back to the firm
Cost Leadership Strategy and the Five
Competitive Forces cont’d …
Product substitutes & rivalry among
existing competitors
 Cost leader is well positioned to:
 Make investments to be first to create
substitutes
 Buy patents developed by potential substitutes
 Lower prices in order to maintain value
position

 Due to cost leader’s advantageous

position:
 Rivals hesitate to compete on the basis of price124
 Lack of price competition leads to greater
profits
READING ASSIGNMENT

23
 Differentiation Strategy
Definition
 A differentiation strategy is an integrated set of
actions designed to produce goods or services that
customers perceive as being different in ways that
are important to them.

 The firm produces non- standardized products for

customers who value differentiated features more
than they value low cost.

24
Examples of Approach for
Differentiation
 Products with unusual features
 Responsive customer service

 Rapid product innovation and

technological leadership
 Perceived prestige and status

 Different tastes

 Engineering design and performance

A firm’s value chain can be analyzed to

determine whether the firm is able to link the
activities required to create value by using
the differentiation strategy 128
Differentiation Strategy and the Five
Competitive Forces
Potential entrants
 Can defend against new entrants
because:
– Entrants’ new products must
surpass proven products
– Entrants’ new products must be at
least equal to performance of
proven products, but offered at
lower prices
129
Differentiation Strategy and the Five
Competitive Forces cont’d …
Bargaining power of suppliers and
buyers
• Can mitigate suppliers’ power by:
 Absorbing price increases due to higher
margins
 Passing along higher supplier prices
because buyers are loyal to differentiated
brand
• Can mitigate buyers’ power by:
 Well differentiated products reduce
customer sensitivity to price increases 130
Differentiation Strategy and the Five
Competitive Forces cont’d …
Product substitutes and rivalry
among existing competitors
• Well positioned relative to
substitutes because:
 Brand loyalty to a differentiated product
tends to reduce customers’ testing of new
products or switching brands
• Well positioned relative to
competitors because:
 Brand loyalty to a differentiated product 131

tends to offset price competition

Competitive Risks of the
Differentiation Strategy
 The price differential between the
differentiator’s product and the cost
leader’s product becomes too large
 Differentiation ceases to provide
value for which customers are
willing to pay
 Experience narrows customers’
perceptions of the value of a
product’s differentiated features
 Counterfeit goods replicate
differentiated features of the firm’s
products at significantly reduced 132

prices
 Focus Strategy
 Definition
 A focus strategy is an integrated set
of actions designed to produce or
deliver goods or services that serve
the needs of a particular
competitive segment.
 Firms choose a focus strategy when
they want their core competencies
to serve the needs of a particular
industry segment or niche at the 133
exclusion of others.
Focus Strategy cont’d …
 Examples of specific market
segments that can be targeted by a
focus strategy:
 Particular buyer group (e.g. youths or
senior citizens)
 Different segments of a product line
(e.g. professional craftsmen versus do-
it-yourselves)
 Different geographic markets
134
Focus Strategy cont’d …
 Types of focused strategies:
 Focused cost leadership strategy
 Focused differentiation strategy
 To implement a focus strategy, the firm
must be able to complete various primary
and support value chain activities in a
competitively superior manner, in order
to develop and sustain a competitive
advantage and earn above-average
returns
 Competitor firms may overlook small
niches
 The firm lacks resources needed to
compete in the broader market, but serves
a narrow segment more effectively than 135
industry-wide competitors.
Competitive Risks of the Focus
Strategies
 The focuser firm may be ‘out
focused’ by its competitors
 A firm competing on an industry-
wide basis decides to pursue the
niche market of the focuser firm.
 Customer preferences in the niche
market may change to more closely
resemble those of the broader
market. As a result, the advantages
of a focus strategy are either
reduced or eliminated. 136
Integrated Cost Leadership
/Differentiation Strategy
 A firm that successfully uses the
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
 A commitment to strategic flexibility is
necessary for successful use of this
strategy 137
Competitive 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
 Earning below-average returns
 Competing at a disadvantage
 Even so, the integrated strategy is an
appropriate choice for firms possessing
the core competencies to produce
somewhat differentiated products at
138

relatively low prices

FUNCTIONAL
-LEVEL
STRATEGY
 Functional Level Strategy
 How Does a Firm Actually Go About
Achieving a Position of Cost-leadership,
Differentiation or Focus?

Through the functional-level strategies of:

 superior efficiency
 superior quality
 superior innovation
 superior customer responsiveness

37
Functional Level Strategy cont’d …
 Functional-level strategy
involves choosing strategies that
will enable functional units to
best perform their functions for
the business they belong to.

38