Chapter 5

Selecting Business-Level Strategies

Generic Strategies
A general way of positioning a firm’s business level strategy within an industry
- Focusing on generic strategies allows executives to concentrate on the core elements of
firms’ business-level strategies
- Builds on the strategic resources available to the firm
- The most popular set of generic strategies is based on the work of Professor Michael
Porter HBR

Strategy
- a road map of the actions an entrepreneur draws up to achieve a company’s mission,
goals, and objectives. It is the company’s game plan for gaining a competitive
advantage
- Three types
● Cost Leadership- Generic strategy that offers products or services with
acceptable quality and features to a broad set of customers at a low price
● Differentiation- A generic strategy that attempts to convince customers to pay a
premium price for its good or services by providing unique and desirable features
● Focused Cost Leadership- Firms that charge relatively low prices for a
sub-group of the overall marketplace. Could be based on geography,
demographics, channel (internet only) or features
● Focused Differentiation- strategy requires offering unique features that fulfill
demands of a narrow market
Economies of scale- Exists when the costs of offering goods and services decreases as the
firm is able to sell more items
● Expenses are distributed across a greater number of items

Business-level strategies examine how firms compete in a given industry

● Generic strategies based on source of competitive advantage - price or differentiation
● Scope of operations targets a broad or narrow market

Generic Bus Strategies

Two competitive dimensions are key:
- Source of competitive advantage
● keep costs down
● offer something unique in market
- Scope of operations
● target all possible customers
● focus on a smaller segment or sub-section of market
Cost Leadership
- is an effective business-level strategy to the extent that a firm offers low prices,
provides satisfactory quality, and attracts enough customers to be profitable.

From Theory to Reality (Porter)

● Become the low cost producer in its industry
● Sources of cost advantage are varied and depend on the structure of the industry, may
include pursuit of economies of scale, proprietary technology, preferential access to raw
materials and other factors
● Low cost producer must find and exploit all sources of cost advantage to achieve and
sustain overall cost leadership
● Leads to above average performance in its industry
● Assuming can set prices at or near industry average

Overall Cost Leadership

Integrated tactics
● Aggressive construction of efficient-scale facilities
● Vigorous pursuit of cost reductions from experience
● Tight cost and overhead control
● Avoidance of marginal customer accounts
● Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales
force, and advertising

Cost Leadership & Economics

Economics tells use cost leadership less effective when
● Small percentage of consumer’s overall budget (salt)
● Low volume of purchases (i.e. PSE)
● Few alternatives (gasoline)
● Higher search costs
Differentiation
- can be an effective business-level strategy to the extent that a firm offers unique
features that convince customers to pay a premium for their goods and services
- Using a differentiation strategy firm compete based on uniqueness, rather than price
(only)
- Success depends on offering unique features that CUSTOMERS value!
- Communicating this enhanced value to the potential customers
- Seeks to be unique in its industry along some dimension(s) that are widely valued by
buyers
- Typically, firm identify & improves this aspect of product & Markets and sells at a price
premium

Differentiation can take many forms

● Prestige/brand
● Quality
● Technology
● Innovation
● Features
● Customer service
● Dealer network

Potential Pitfalls of Differentiation Strategies

● Uniqueness/differentiation that add little valuable
● Too much differentiation
● Too high a price premium
● Differentiation that is easily imitated
● Dilution of brand identification through product-line extensions, especially reduced price
extensions of brands (i.e. levis jeans at Walmart)
● Failing to focus on Buyers perceptions of value (not the sellers)

Focused Cost Leadership and Focused Differentiation

- Focus strategies: The generic focus strategy rests on competing (only) within a
subsection of the potential buyers instead of across all consumers within an industry.
- Focus strategies can be effective business-level strategies to the extent that a firm can
match their goods and services to specific niche markets
- Firms select a target population in the industry and tailors its strategy to serving them to
the (possible) exclusion of others
Focused Cost Leadership
- competing based on price, but only within a narrow market
- Key difference between overall Cost Leadership & Focused Cost Leadership is that
while both groups use price as primary source of competitive advantage
- requires competing based on price only within a narrow or limited marketplace
● A firm following this strategy does not necessarily charge the lowest prices in
industry
● Instead, it charges low prices relative to the other firms that compete within
narrow target market
● Nature /size of target market varies across market segment targeted
- Could be based on:
● Demographics
● Geographic
● Service
● Degree of Consumer involvement
● Sales Channels
● Price level marketing

Firms that charge relatively low prices for a sub-group of the overall marketplace. Could be
based on geography, demographics, channel (internet only) or features
● Difficult to execute - Creating unique features and communicating to customers why
these features are useful generally raises a firm’s costs of doing business
● Similar to overall Cost Leadership lower overhead costs and economies of scale useful
● Depending on niche, may be open to duplication by competitors

Focused Differentiation Leadership

- requires offering unique features that fulfill demands of a narrow market
● While a differentiation strategy involves offering unique features that appeal to a
variety of customers, the need to satisfy the desires of a narrow market means
that the pursuit of uniqueness is often taken to the proverbial “next level” by firms
using a focused differentiation strategy.
● The unique features provided by firms following a focused differentiation strategy
are often very specialized
- Could be based on:
● Higher quality product/service
● Extensive R&D
● Demographics (late middle age men)
● Geographic (‘warm’ retirement communities)
● Buying experience (Financial Services, Cadillac)
● Degree of Consumer Sophistication (high end stereo)
● After-sales support (Nordstrom, HOG)
Best-Cost Strategy
● A best-cost strategy can be an effective business level strategy to the extent that a firm
offers differentiated goods and services at relatively low prices.
● This strategy is difficult to execute in part because creating unique features and
communicating to customers why these features are useful generally raises a firm’s
costs of doing business.

Stuck in the Middle

- A situation where business level strategy
● does not offer features that are unique enough to motivate consumers
● prices are too high to effectively compete on price
- Usually, firms become stuck in the middle not because they lack a well-defined strategy
But because firms are simply outmaneuvered by rivals

When executing a business-level strategy, a firm must not become stuck in the middle
between viable generic business-level strategies by neither offering unique features nor
competitive pricing.
Stages of Industry Life Cycle

1. Strategies in Introduction Stage

- Products are unfamiliar to consumers
- Market segments not well defined
- Product features not clearly specified
- Competition tends to be limited
- Strategy
● Develop product and get users to try it
● Generate exposure so product becomes “standard”

2. Strategies in the Growth Stage

- Characterized by strong increases in sales
- Attractive to potential competitors
- Primary key to success is to build consumer preferences for specific brands
- Strategy
● Brand recognition
● Differentiated products
● Financial resources to support value-chain activities

3. Strategies in the Maturity Stage

- Aggregate industry demand slows
- Market becomes saturated, few new adopters
- Direct competition becomes predominant
- Marginal competitors begin to exit
- Strategy
● Efficient manufacturing operations and process engineering
● Low costs (customers become price sensitive)

4. Strategies in the Decline Stage

- Industry sales and profits begin to fall
- Strategic options become dependent on the actions of rivals
- Strategy
● Maintaining
● Exiting the market
● Harvesting
● Consolidation

The Best Online Firm

1. They make sure customers can reach a human being easily
2.They respond to inbound messages with lightning speed
3.They ship crazy fast
4.They give money back as quickly as they take it
 Chapter 6
Supporting the Business-Level Strategy: Competitive and Cooperative Moves
- The study of competitive moves draws from military history, including Sun Tzu’s classic
book, The Art of War
- Business strategists are familiar with a number of competitive moves that may help
guide their firms to victory.

Firms can take advantage of a number of competitive moves to shake up or otherwise get
ahead in an ever-changing business environment.

● First mover advantage

● Disruptive Innovation
● Blue ocean thinking
● Foothold
● Bricolage

When threatened by the competitive actions of rivals, firms possess numerous ways to
respond, depending on the severity of the threat including:
Multipoint competition
● Mutual forbearance
● Responses to disruptive innovation
● Fighter brands
● Speed of response

Speed of Response
- Is important when under attack. A slow response might lead a beverage, for example, to
be crushed by competition. However, despite the fact that RC Cola been responsible for
many innovations in the soft drink industry such as diet and caffeine- free colas, the
quick responses of Coca Cola and Pepsi have kept RC Cola from taking market share
from them
- In hyper-competitive world, firms must cope with rapid-fire barrage of attacks from rivals
- Speed is essential in responding (or competitors may capture the market…)
- Jack Welch - success in most competitive rivalries “is less a function of grandiose
predictions than it is a result of being able to respond rapidly to real changes as they
occur. That’s why strategy has to be dynamic and anticipatory.”

Multipoint Competition
- Is a situation where a firm faces the same rival in more than one market.
- Firms faces same rival in multiple markets
Mutual Forbearance
- Arises when rivals each realize that they have more to lose through aggression against
each other than they can gain.
- occurs when rivals do not act aggressively because each recognizes that the other can
retaliate in multiple markets

Three main options available for responding to a disruptive innovation

- Ignore the disruption
- Engage in a counterattack using different goods/ services
- Directly match the competitor’s move

Fighting Brands
- Are lower-end brand that a firm introduces to try protect the firm’s market share without
damaging the firm’s existing brand

Price Wars and Fighting Brands

- Lowering prices, price wars, can be effective strategy in the short term
- But, may create long-term problem of trying to return to original price level, with new
consumer expectations
- Creation of fighting brand is one strategy that can prevent/reduce this problem
- Fighting brand is a lower-end lower-cost brand that a firm introduces to try to protect the
firm’s market share without damaging the firm’s existing brands.
Competitive Moves
First Mover Advantage
- exists when making the initial move into a market allows a firm to establish a
dominant position that other firms struggle to overcome

Recall - a strategic resource is an asset that is valuable, rare, difficult to imitate, and
non-substitutable.
- Often requires significant R&D, & product testing costs
- A first-mover cannot be sure that customers will embrace its offering, making a first
move inherently risky
- First movers must be willing to commit sufficient resources to follow through on their
pioneering efforts

First Mover – How to Fail

- Does the product/service provide a truly sustainable competitive resource
- Or is Innovation easy to copy, or worse improve on...
- Can company preferably continue to improve product, or at a minimum, match product
improvements (which are almost surely going to appear)
- Failure to market aggressively (it’s new, consumers will not know its value for them)

Disruptive Innovations
- Big change!
- Affects whole market or industry
- Very hard to predict, but usually slow to develop
- Market is always evolving, difficult to pick out which are truly disruptive amongst market
‘noise’
- Includes creating brand new market where none existed before (i.e. Smart phone apps)
- As market emerges or develops, other firms must decide how to respond, embrace or
compete

Recent Disruptions
- Energy Efficient light bulbs
- Kindle (Gaming)
- Electric & Driverless cars
- E-cigarettes
- iphone apps/mobile computing/texting
- Robots - vacuum cleaners, lawn mowers too!
- Social Media - YOUTube, Facebook, Pinterest, etc.
- Modern Container Shipping
Footholds
- Value often far exceeds small size & costs of maintenance
- Test market & faster expansion if things go well
- Can deter competitors & make harder to predict next move

● Carl von Clausewitz’s 19th military strategy “aim at the sharp end of spear where
rivals are weak or uninterested in what you are doing”

Blue Ocean Strategy

- Involves creating a new, untapped market rather than competing with rivals in an
existing market
- Creating a brand new marketplace
● Coffee Shops, Women’s underwear stores
● Transportation - Mom Vans / SUV / Electronic
● Voluntourism

Bricolage
- Most innovation are improvements to existing products (including new uses)
- Many others, Bricolage, are joining two products or services together to create
something new
- And, A few are true Blue Ocean events!
Cooperative Moves
- In addition to choosing their own firm’s strategic actions, executives also have to
decide whether and how to respond to rival’s moves
- Research indicates that three factors determine the likelihood that a firm will respond to
a competitive move: awareness, motivation, & capability

Four types of Cooperative Moves

Joint venture
- Cooperative arrangement that involves 2 or more firms each contributing to the
creation of a new entity.
- Is a cooperative arrangement that involves two or more firms each contributing to the
creation of a new entity
- The partners share decision-making authority, control of the operation, & any profits
- Advantages
● Enter related businesses or new geographic markets or gain new technological
knowledge
● Access to resources, specialized staff & technology
● Sharing of risks with a venture partner
- Disadvantages
● Time and effort to build the relationship, challenges:
● The objectives of the venture are not 100% clear and communicated to everyone
involved.
● There is an imbalance in levels of expertise, investment or assets brought into
the venture by partners.

Strategic alliance
- Cooperative arrangement between 2 or more orgs that does not involve creation of new
entity
- Is a cooperative arrangement between two or more organizations that does not involve
the creation of a new entity
- Advantages
● Allowing each partner to concentrate on activities that best match their
capabilities.
● Learning from partners & developing competences that may be more widely
exploited elsewhere.
● Better use of resources & competencies to survive
- Disadvantages
● Potential to reduce future opportunities - unable to enter into agreements with
partner’s competitor
● Lack of commitment to the partnership
● Risk of sharing too much knowledge and the partner company becoming a
competitor
Co-location
- Occurs when goods and services offered under different brands are located very close to
each other
- Advantages
● A bigger set of customers may be attracted to a set of co-located firms than (sum
of) individual locations
- Disadvantages
● co-location can be very expensive

Co-opetition
- Refers to a blending of competition and cooperation between firms
- Advantages
● reduction of transaction costs & other savings and increasing expectation among
customers
- Disadvantages
● competition and cooperation may not be always successful between two firms
 Chapter 7
Economies of Scale
- More (international) customers lowers costs for many goods
● Overhead (fixed costs) shared across more sales
● Shared Marketing costs (with different language)
● Shared R&D
Offshoring
- Offshoring involves relocating a business activity (manufacturing) to another country
- It While it can reduce a firm’s costs of doing business, the job losses in the firm’s home
country can devastate local communities, bad publicity
- Increase delivery time & costs, sometimes quality issues
- Complexity of operating in a foreign culture and language
- Some recent trends to re-shoring
Potential Benefits
- Much cheaper labor costs
- Diversification of Risk(s)
Suppliers
- International production can increase Supply Chain risk through longer transportation
times, export/import regulations
- But, better bargaining position with existing suppliers
- Stronger leverage when negotiating prices with suppliers, and potential for access to
new suppliers (reduce both costs & risk)
- Lower costs from lower production costs increases competitive potential
Benefits of International Presence
- Increase the size of potential market(s)
- Economies of scale (lower average costs/unit)
- Extend the life cycle of a product
- Optimize the physical location for every activity in its value chain
● Performance enhancement
● Cost reduction
● Risk reduction
Competing in international markets involves important opportunities and daunting
threats
● Opportunities include access to new customers, lowering costs, and diversification of
business risk
● Threats include political risk, economic risk, & cultural risk
Drivers of Success & Failure
- Friedman argues that advances in technology, communications, and transportation have
leveled the playing field into a “Flat World”
- Reduces the strategic element of geography
- But, research has NOT supporting all his conclusions
International Market Risk

Political Risk
- Refers to the potential for government upheaval or interference that could harm business
operations within the country.
- of government upheaval or interference
● Unstable gov’ts make it difficult to plan for future
● Hostile gov’t may impose new taxes & regulations

Nationalization
- Seizure of privately-owned businesses

Economic Risk
- Refers to the potential for a country’s economic conditions and policies, property rights
and protections, and currency exchange rates to harm a firm’s operation within a
country.
- potential for adverse change in country’s economic conditions & policies, property rights
protections,& currency exchange harming viability of business

Cultural Risk
- Refers to the potential for a company’s operations in a country to struggle due to
differences in language, customs norms, and customer preferences
- potential for a company’s operations in a country to struggle due to differences in
language, customs, norms and customer preferences
- Risk that ignorance of cultural aspects will damage firm’s chances of success is a foreign
market
- Culture is the shared assumptions and beliefs or a group of people, businesses to
nations
- Combination of visible and invisible - Hard to notice, simply how we do things around
here…
- And, dynamic… keeps changing

Natural Disaster
Porter’s Diamond Model
- The likelihood that a firm will succeed in international markets is shaped by 4
aspects of its domestic market which are:

Firm strategy, Structure, & Rivalry

- How challenging it is to survive domestic competition
● Companies that have survived intense rivalry within their home markets are likely
to have developed strategies and structures that will facilitate their success when
competing in international markets
● New fast-food restaurants are an example
● Companies that are monopolies face a lot more risk in competing internationally

Demand Conditions
- Developing excellence in product, production, delivery, etc to serve domestic market,
can create a strategic advantage when facing global market
● especially when domestic consumer have high expectations of the goods &
services that they buy

Factor Conditions
- The nature of raw material and other inputs that firms need in order to create goods and
services
● Firms benefit when they have good access to factor conditions and face
challenges when they do not
● Overcoming disadvantages in factor conditions leads companies to develop
unique skills
● Just-in-time inventory management: A production system that conserves
space and lowers costs, by requiring inputs to a production process to arrive at
the moment they are needed

Related & Supporting Industries

- Degree of innovation, & flexibility
- Centers of Excellence – Silicon Valley, Drug companies near Montreal
- Japanese excellence is space utilization
- Cars, Detroit & Windsor
- Univ Research Concentration
- Even cities are an example
Multinational corporation
- A firm that has operations in more than one country

International strategy
- used to guide a firm’s effort in various countries

Types of International Strategies

- These strategies vary in their emphasis on achieving efficiency around the world while
responding to local needs

Multi-domestic strategy
- Sacrifices efficiency in favor of being responsive to local preferences within each market.

Global Strategy
- Sacrifices responsiveness to local preferences in favor of efficient &
economies of scales at global level [complete opposite of multi-domestic
strategy]
● Some minor local modifications may be made, but offer essentially
the same products or services in each market.
● Global strategies also can be very effective for firms whose product
or service is largely hidden from the customer’s view

Transnational Strategy
- Involves balancing the desire for efficiency with responding to local
preferences
● Seeks a middle ground between a multidomestic strategy and a
global strategy
Entry Options for Competing in International Markets

Exporting
- Relatively inexpensive way to
enter foreign market
- Assemble goods at home, &
ship - Minimal risk
- Uses local sales companies
- Successful distributors
● Have complementary products
● Behave as if business partners
● Invest in training, info sys,
advertising & promo.
- Once a firm’s products are found to be viable in a particular country,
exporting often becomes less desirable
- A firm that exports its goods loses control of them once they are turned
over to a local firm for sale locally
● But, local distributor may treat customers poorly and thereby
damage the firm’s brand
● Distributors have limited incentive for loyalty…
- Also, exporters may want their firm rather than a local distributor to enjoy
the retail profits, when products are sold to end customers
- Globalization depends Cheap Oil
● Rising transportation costs favor local economy (i.e. steel)
● Local market
❖ Reduced competition
❖ Smaller market
❖ Greater need for generalists
● 100 mile diet
-