Customers and Business Level Strategies

Business Level Strategy: Integrated and coordinated set of commitments and actions the firm uses to gain a
competitive advantage by exploiting core competencies in specific product markets

- Three questions to determine business level strategy:

- Who will be served
- Market Segmentation: the process used to cluster people with similar needs into
individual and identifiable groups
- What needs those target customers have that it will satisfy
- Must identify the needs of your chosen group that your products and services will
satisfy
- How those needs will be satisfied
- Determine how to use its capabilities and competencies to develop products that
can satisfy the needs of its target customers

The Purpose of a Business Level Strategy

- The purpose of a business-level strategy is to create differences between the firm’s position and those
of its competitors
- To position differently, a firm must choose to either:
- perform activities differently
- or to perform different activities

Types of Business-Level Strategies

- Two decisions must be made to derive a business level strategy:

- Basis of Value: The firm must either focus on having lower costs than its competitors or the
ability to differentiate and command a premium price
- Competitive Scope: The firm must either focus on the broad market or on a narrow market
segment

- Cost Leadership Strategy

- The cost leadership strategy is 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
- Rivalry:
- Rivals will hesitate to compete with a cost leader on price
- Buyer Power:
- Powerful customers can force a cost leader to reduce its prices
- If they were to force prices below the level at which other competitors earn average
returns, they may put them out of business and give more power back to the cost
leader
- Supplier Power:
- The higher margins held by cost leaders allow it to absorb any price increases put
forth by suppliers
- Powerful cost leaders can force suppliers to hold their prices due to their volume of
purchases
- Entrants:
 - The high efficiency and enhanced profit margins are a large barrier to entry
- Substitutes:
- The cost leader has the most flexibility to lower prices to retain customers in the
face of a strong substitute
- Risks:
- The process used to produce and distribute goods can be made obsolete by
innovation
- Too much focus on costs can lead to neglecting customers perceptions of
competitive levels of differentiation
- Competitors may learn to imitate the cost leaders methods

- Differentiation Strategy
- The differentiation strategy is 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
- Rivalry:
- Customers are loyal purchasers of products differentiated in ways that are
meaningful to them
- Their loyalty reduces their price sensitivity which makes a firm protected from
rivalry
- Buyer Power:
- Differentiated products spur customer loyalty which reduces price sensitivity and
lowers bargaining power
- Supplier Power:
- Differentiated products require high-quality components which increases the firm's
costs - there can be some supplier dependency
- The loyalty on the buyer side can allow the company to pass these costs on
- Entrants:
- Customer loyalty from differentiation creates a large barrier to entry as an entrant
would need large initial investments and patience to gain customer loyalty
- Substitutes:
- Firms selling brand-name goods and services to loyal customers are positioned
effectively against product substitutes
- Companies without brand loyalty face a higher probability of their customers
switching either to products which offer differentiated features that serve the same
function or to products that offer more features and perform more attractive
functions
- Risks:
- Customers may decide that the price difference is not worth the improvements in
product quality
- The differentiation may stop providing value that customers are willing to pay for

- Focus Strategy
- The focus strategy is an integrated set of actions taken to produce goods or services that
serve the needs of a particular competitive segment
- a particular buyer group
- a different segment of a product line
- a different geographical market
 - The essence of the focus strategy “is the exploitation of a narrow target’s differences from
the balance of the industry”
- With a focus strategy, firms must be able to complete various primary value-chain activities
and support functions in a competitively superior manner to develop and sustain a
competitive advantage and earn above-average returns
- Focused Cost Leadership:
-
- Focused Differentiation:
-
- Risks:
- Being out focussed by the competition: someone takes a more narrow segment
- A competitor who services the entire market may decide that the market segment
the firm is focussing on is attractive and worthy of pursuing too
- The needs of the narrow segment may become too similar to that of the broader
market

- Integrated Strategy
- Many consumers have high expectations to receive both low prices and a somewhat
differentiated product
- The integrated cost leadership/differentiation strategy involves engaging in primary value-
chain activities and support functions that allow a firm to simultaneously pursue low cost and
differentiation
- The objective of using this strategy is to efficiently produce products with some
differentiated features
- Often firms are “caught in the middle” because they do not differentiate effectively or
provide the lowest-cost goods
- 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/differentiation
strategy in order to produce somewhat differentiated products at relatively low costs
- Flexible manufacturing systems
- Information networks
- Total quality management systems
- Risks:
- Firms find it difficult to perform primary value-chain activities and support functions
in ways that allow them to produce relatively inexpensive products with levels of
differentiation that create value for the target customer
- “Stuck in the middle”