CHAPTER 4: BUSINESS-LEVEL STRATEGY
in that human capital is one of the most
DIGITAL: AN INCREASINGLY IMPORTANT ASPECT
OF STRATEGY CHOICE AND STRATEGY
IMPLEMENTATION
Realities of today’s firms
 Pace of change is faster and more relentless
 Level of uncertainty is higher
 Greater complexity
Types of Strategy
 Business-level
 Corporate level
 Merger and acquisition
 International
 Cooperative
- Each type of strategy a firm chooses to implement
helps it deal with the competitive realities.
Strategy
- Integrated and coordinated set of actions and
commitments designed to exploit core competencies
and gain a competitive advantage.
- Helps companies in their efforts to change quickly
and effectively and reduce the levels of uncertainty
and complexity in their external environment and
internal environment.
- In this sense, when involved with strategy leaders and
those with whom they work seek to set a firm’s
direction, sequence how the firm will allocate and as
necessary reallocate resources and commit to a
creating a certain type of value for a certain type of
customer.
Business-level strategy
- Finds a firm choosing a strategy to use to gain a
competitive advantage by exploiting its core
competencies within one or more specific product
markets.
Innovation
- Key part of firms’ efforts to achieve success with
their strategies.
- Information and technologies play vital roles in
innovation related projects and activities.
Digital Strategy
- Firms need as a part of what they do to implement
each type of business level strategy.
- Committed because it is believed that the world’s
competitive environments are increasingly
information intensive and interconnected
- “the application of information and technology to
raise human performance”
- Increasing human performance is important
significant competitive advantages a firm
can develop. Thus, digital strategy has the
potential to help the firm develop a
competitive advantage – human capital – as
it seeks to implement its business level
strategy.
- People engaged with digital activities within
a company helped the firm become more
agile and more capable of dealing with
competitive challenges more quickly and
effectively.
Digital Principles
- Principles that redefine company imperatives around
customers, growth, efficiency, and innovation – are
the basis of an effective digital strategy.
- Using digitally based technologies and tools such as
data analytics (which is the gathering and
interpreting of data to identify behavioral patterns
among customers for the purpose of serving
customers needs better during future transactions), a
firm’s digital strategy finds it:
(1) Concentrating on outcomes customers repeatedly
notice, value, and choose;
(2) Using information and technologies to derive
more output from each unit of input; and
(3) Seeking to learn how to do new things in new
ways as a means of enhancing the functionality
of products it creates for customers.
Leaders committed to the importance of developing a digital
strategy are foundational to a firm’s effort to develop such a
strategy. Working with others, these leaders make choices how
to form and effective data analytics function, determine the
degree to which cloud computing (which is the sharing of
resources, software, and information via an Internet-based
network) benefits the firm's digital strategy and predict the
future with the type of clarity that allows the firm to recognize
what could be a viable competitive position for it in the years
to come.
Strategy
- Concerned with making choice among two or more
alternatives.
Choice of strategy
- Indicates the firm’s decision to pursue one course of
action instead of others.
Influencers of the choices the firms make:
1. Opportunities and threats in the external environment
2. Nature and quality of resources, capabilities, and core
competencies in the firm’s internal organization
Digital strategy
- Core of the firm’s effort to form digital strategy:
information and technologies available to analyze it.
- Used to facilitate the selection and implementation of
the firm’s strategy or strategies
- Helps a firm concentrate on understanding its
customers and their needs with greater clarity as a
foundation for being able to develop innovations that
create more value for those customers
Integrating information and technologies has the potential to
help employees increase their effectiveness and efficiency,
possibly resulting in a competitive advantage for the firm in
the form of its human capital. Smart firms recognize that
information and technologies to manage it can inform
determining what customers the firm will seek to serve as well
as the strategy it will use to do so.
Strategies
- Purposeful
- Develop before firms engage rivals in marketplace
competition
- Demonstrate a shared understanding of the firm’s
vision and mission
o A strategy that is consistent with the
conditions and realities of the firm’s external
and internal environment marshals,
integrates, and allocates available resources,
capabilities, and competencies to align them
properly with the opportunities in the
external environment.
o When effective, strategy also rationalizes the
firm's vision and mission along with the
actions taken to achieve them.
o Sound strategic choices that reduce
uncertainty regarding outcomes are the
foundation for building successful strategies.
Business-level strategy
- Indicates the choice says the firm has made about
how it intends to complete in individual product
markets
- is an integrated and coordinated set of commitments
and actions the firm uses to gain a competitive
advantage by exploiting core competencies in a
specific product market.
- Every firm must develop and implement a
business level strategy. However some may
not use all of the strategies.
- Is the core strategy – strategy that the firm forms to
describe how it intends to compete against rivals on a
day-to-day basis in its chosen product market.
- Customers – foundation of successful
business-level strategies
- In terms of customers, when selecting a business
level strategy, the firm determines
1. Who will be served
2. What needs those target customers have it will
satisfy, and
3. How those needs will be satisfied.
NO STRATEGY IS RISK-FREE.
4-1 CUSTOMERS: THEIR RELATIONSHIP WITH
BUSINESS-LEVEL STRATEGIES
Strategic competitiveness
- Results only when the firm satisfies a group of
customers by using its competitive advantages as the
basis for completing an individual product markets
A key reason firms must satisfy customers with their business
level strategy is that returns earned from relationships with
customers are the lifeblood of all organizations.
Effectively managing relationships with customers
 Firms strengthen their relationship with the customers
by delivering superior value to them.
 Strong interactive relationship with customers =
foundation for the firm to earn profits
 Delivering superior value = increased customer
satisfaction = positive relationship with profitability
 Example: Amazon – competitors and others admire it
for the quality of information it maintains about its
customers, the services it renders, and its ability to
anticipate customer’s needs. It tries to serve what it
believes are the unique needs of each customer. To
date, the firm has maintained strong reputation for
being able to do this.
Three dimensions that characterize firms’ relationships
with customers.
1. Reach – firm’s access and connection to customers
- Reach = adding more customers
- Critical dimension for social networking
sites
e.g., Facebook – world’s most popular
networking sites; Netflix Inc.
2. Richness – concerns the depth and detail of the two-
way flow of information between the firm and
customers.
- The potential of the richness dimension to
help the firm establish a competitive
advantage in its relationship with customers
leads many firms do offer online services as
a means of superior management of
information exchanges with them.
 - Internet technology and ecommerce
transactions, which are part of a firm's
digital strategy, have substantially reduce
the cost of meaningful information
exchanges with current and potential
customers.
- E.g., Amazon
3. Affiliation – concerned with facilitating useful
interactions with customers.
- Viewing the world through the customer's
eyes and constantly seeking ways to create
more value for the customer have positive
effects in terms of affiliation.
- It enhances customer satisfaction, fewer
customer complaints.
- CMO “Chief Customer Officer” (prev
carried the title of “Chief Marketing
Officer”) – companies have to enhance their
affiliation with customers.
- E.g., Tesco, Walmart
WHO: Determining the Customers to Serve
Market Segmentation
- Is the process of dividing customers into groups
based on their needs
- Process used to cluster customers with similar needs
into individual and identifiable groups
WHAT: Determining which Customer Needs to Satisfy
- Identify the targeted customer group’s needs that its
products can satisfy
- Needs are related to a product’s benefits and features
- E.g., Kroger (largest grocery store chain in Us),
Starbucks (experience – customize own drinks)
HOW: Determining Core Competencies Necessary to
Satisfy Customer Needs
- How to use its resources, capabilities, and
competencies to develop products that can satisfy its
target customers’ needs
Core competencies
- Are resources and capabilities that serve as a source
of competitive advantage for the firm over its rivals.
- Firms use core competencies (how) the implement
value creating strategies, thereby satisfying
customers’ needs.
Our discussion about customer shows that all organizations
must use their capabilities and core competencies (the how) to
satisfy the needs (the what) of the target group of customers
(the who) the firm has chosen to serve.
Basis for Customer Segmentation
Consumer Markets
Demographic Age, income, sex, etc.
Factors
Socioeconomic Social class, stage in the family
Factors cycle
Geographic Factors Cultural, regional, and national
differences
Psychological Lifecycle, personality traits
factors
Consumption Heavy, moderate, light users
patterns
Perpetual factors Benefit segmentation, perceptual
mapping
Industrial Markets
End use segments Identified by SIC (Standard
Industrial Classification) code
Products segments Based on technological differences
or production economics
Geographic Defined by boundaries between
segments countries or by regional differences
within them
Common buying Cut across product market and
factor segments geographic segments
Customer size
segments
Purpose of Business-Level Strategy
- To create differences between the firm’s position and
those of its competitors
- Perform activities differently or perform different
activities (essence of business-level strategy)
- Business level strategy is a deliberate choice about
how it will perform the value chains primary and
support activities to create unique value.
- Successful use of business level strategy = firm
learning how to integrate the activities it performs in
ways that create superior value for customers.
- E.g., Southwest Airlines – uses cost leadership
strategy
o The key to Southwest’s success has been its
ability to maintain low cost across time
while providing customers with acceptable
levels of differentiation such as an engaging
culture. Firms using the cost leadership
strategy must understand that in terms of
sources of differentiation accompanying the
cost leader’s product, the customer defines
acceptable.
o Fit among activities is a key to sustainability
of competitive advantage, including
Southwest Airlines.
o Strategic fit (expresses the degree to which
an organization is matching its resources
and capabilities with the opportunities in the
external environment) among the many
activities is critical for competitive
advantage.
 o It is more difficult for a competitor too much
a configuration of integrated activities then
to imitate in particular activity such as sales
promotion, or process technology.
Business Model and their Relationship with Business-level
Strategies
Business model – describes what a firm does to create,
deliver, and capture value for its stakeholders.
Stakeholders value related yet different outcomes.
Stakeholders Firm create and delivers value in
the form of
shareholders Return on their investment
Customers Product featuring the combination
of price and features for which
they are willing to pay
employees Job about which they are
passionate about, opportunities to
develop their skills by participating
in continuous learning experiences
A business model is a framework for how the firm will
create, deliver, and capture value while a business-level
strategy is the set of commitments and actions that yields the
path a firm intends to follow to gain a competitive advantage
by exploiting its core competencies in a specific product
market.
Understanding customers in terms of who, what, and how
is foundational to developing and using successfully both a
business model and a business-level strategy.
Different business model:
1. Franchise - firm licensing its trademark and the
processes it follows to create and deliver a product to
franchisees.
- The firm franchising (franchisor) captures value by
receiving fees and royalty payments from its
franchisees.
- E.g., McDonald’s (with cost leadership strategy –
offered at low price but with acceptable levels of
differentiation), and Panera Bread (with
differentiation strategy - offered differentiated food
items in a differentiated setting to provide customers
with value for which they are willing to pay and at a
cost that is acceptable to them)
2. Subscription – offering a product to customers on a
regular basis.
- E.g., Blue Apron, Netflix
3. Freemium - the firm provides a basic product to
customers for free and earns revenues and profits by
selling a premium version of the service.
4. Advertising - where for a fee, firm provide
advertisers with high quality access and their target
customers.
- E.g., Google, Pinterest
5. Peer-to-peer - where a business matches those
wanting a particular service with those providing that
service.
- Task Rabbit and Airbnb
Types of Business-level Strategies
a. cost leadership
b. differentiation
c. focused cost leadership
d. focused differentiation
e. integrated cost leadership/differentiation
- each strategy can help firm establish and exploit
competitive advantage (either lowest cost or
distinctiveness) as the basis for how it will create
value for customers within particular competitive
scope (broad market or narrow market).
Two Types of Potential Competitive Advantages:
1. Lower cost than rivals;
2. The ability to differentiate and command a premium
price that exceeds the extra cost of doing so.
2 Types of Target Markets:
1. Broad Market – firms seek to use their capabilities to
create value for customers on an industry-wide basis.
2. Narrow Market – the firm intends to serve the needs
of a narrow customers group. E.g., buyers with
special needs, buyers located in specific geographic
region.
 A firm could also strive to develop a combined low
cost/distinctiveness value creation approach as the
foundation for serving a target customer group that is
larger than a narrow market segment but not as
comprehensive as a broad (or industry wide)
customer group. In this instance, the firm uses the
integrated cost leadership/ differentiation strategy.
Cost-leadership Strategy
- is an integrated set of actions taken to produce
products with features that are acceptable to
customers at the lowest cost, relative to that of
competitors.
- Firms using the cost leadership strategy commonly
sell standardized goods or services, but with
competitive levels of differentiation, to the industry’s
most typical customer.
- Process innovations, which are newly designed
production and distribution methods and techniques
 that allowed the firm to operate more efficiently, are
critical to firms’ efforts to use the cost leadership
strategy successfully.
- Firms using this strategy scour the world to find low-
cost producers to which they outsource various
functions as mean of keeping their cost low.
- Research suggests that having a competitive
advantage in logistics (inbound – material handling,
warehousing, and inventory control; outbound –
collecting, storing and distributing products) creates
more value with a cost leadership strategy than with a
differentiation strategy.
Another way of cutting costs: OUTSOURCING
- Makes the firm more dependent to suppliers. Because
of this, firms analyze outsourcing possibilities
carefully prior to committing any of them.
Why do firms need to analyze outsourcing carefully before
committing to any of them?
- Outsourcing creates interdependencies between the
outsourcing firms and the suppliers. If dependencies
become too great, supplier power may result in
higher costs for the outsourcing firm.
- Cost leaders also examine all support activities to
find additional potential cost reductions.
Value-chain analysis
- Firms use to identify the parts of the company’s
operation that create value and those that do not.
Effective use of cost leadership strategy
- Allows the firm to earn above average returns in spite
of the presence of strong competitive forces.
Examples of Value-creating activities associated with the
cost-leadership strategy.
Support Finance
Functions - Manage financial resources to ensure
positive cash flow and low debt cost.
Human resources
- Developed policies to ensure efficient
hiring and retention to keep costs low.
Implement training to ensure high
employee efficiency.
Management Information Systems
- Developed and maintain cost-effective
MIS operations.
Value Supply-Chain Management
Chain - Effective relationships with suppliers to
Activities maintain efficient flow of goods
(supplies) for operation.
Operations
- Build economies of scale and efficient
operations (e.g., production processes)
Distribution
- Use of low-cost modes of transporting
goods and delivery times that produce
low costs.
Marketing (including sales)
- Targeted advertising and low prices for
high sales volumes.
Follow-up service
- Efficient follow-up to reduce returns
How firms seek to earn above-average return by implementing
the cost leadership strategy:
 Rivalry with existing competitors
- Rivals hesitate to compete on price variables.
Factors that influence the degree of rivalry (when
implementing cost-leadership strategy):
o Organizational Size
o Resources possessed by rivals
o Firm’s dependence on a particular market
o Location and prior competitive interactions
between firms
o Firms’ reach, richness, and affiliation with
its customers
- Cost leaders try to develop strong and mutually
supportive relationships with stakeholders to reduce
rivalry and lower their cost as a result.
- Guanxi – name use to describe relationships that
Chinese firms develop with others to reduce rivalry.
 Bargaining Power of Buyers (Customers)
- Powerful customers can force a cost leader to reduce
its prices.
- In some cases, powerful customers may pressure
firms to provide innovative products and services.
 Bargaining power of Suppliers
- Cost leaders can absorb its suppliers’ price increases
- A powerful cost leader may be able to force its
suppliers to hold down their prices, which would
reduce the suppliers’ margins in the process.
- To reduce costs, some firms may outsource an entire
function such as manufacturing to a single or a small
number of suppliers.
 Potential entrants
- Through continuous effort to reduce cost to levels
that are lower than those against whom it competes, a
cost leader become highly efficient. Increasing levels
of efficiency enhance profit margin. In turn, attractive
profit margins create an entry barrier to potential
competitors.
 Product Substitutes
- A product substitute becomes a concern for the cost
leader when its features and characteristics, in terms
of cost and levels of differentiation that are
 acceptable to customers, are potentially attractive to
the firm’s customers.
- Cost leaders have more flexibility than do its
competitors.
 Competitive risk of cost leadership strategy
1. Innovations by competitors can quickly
eliminate cost advantage
2. Too much focus on cost reduction versus
competitive levels of differentiation
3. Competitors may learn how to successfully
imitate a cost leader’s strategy
Differentiation Strategy
- Is an integrated set of actions taken to produce
products (at an acceptable cost) that customers
perceive as being different in ways that are important
to them.
- While cost leaders serve a typical customer in an
industry, differentiators target customers for whom
the firm creates value because of the manner in which
its products differ from those produced and marketed
by competitors.
- Product innovation, which is “the result of bringing
to life a new way to solve the customer's problem –
through a new product or service development - that
benefits both the customer and the sponsoring
company," is critical to successful use of the
differentiation strategy.
Why do firms need to provide customers with
differentiated products at COMPETITIVE COSTS?
- Firms must be able to provide customers with
differentiated products at competitive cost to reduce
upward pressure on the price they pay. When a firm
produces differentiated features for its product at
noncompetitive cost, the price for the product may
exceed what target customers are willing to pay. If
firms have a thorough understanding of the value its
target customers seek, the relative importance they
attach to the satisfaction of different needs and for
what they are willing to pay a premium, the
differentiation strategy can be effective in helping
them earn above average returns. Of course, to
achieve these returns, the firms must apply its
knowledge capital (knowledge held by its employees
and managers) to provide customers with a
differentiated product that provides them with value
for which they are willing to pay.
To maintain success by implementing the differentiation
strategy, the firm must:
- consistently upgrade differentiated features
- create new valuable features without significant cost
increases
 Because a differentiated product satisfies customers’
unique needs, a firm using the differentiation strategy
are able to charge premium prices. The ability to sell
a product at a price that substantially exceeds the
cause of creating its differentiated features allows the
firm to outperform rivals and earn above average
returns.
 A firm using differentiation strategy seeks to be
different from its competitors in as many dimensions
as possible.
Approaches to differentiation
 Unusual features
 Responsive customer service
 Rapid product innovations
 Technological leadership
 Perceive prestige and status
 Different tastes
 engineering design and performance
- Virtually anything a firm can do to create real or
perceived value in consumers’ eyes is a basis for
differentiation.
- E.g., Halliburton’s – focus on superior execution of
projects; Subaru’s focus on product longevity and
durability.
Firms use the value chain to determine if they are able to link
the activities required to create value by using the
differentiation strategy. Companies without the skills needed
to make these activities cannot expect to use the differentiation
strategy successfully.
Support Finance
Functions - Make long term investments in the
development of new technology and
innovative products, in marketing and
advertising, and in an ability to provide
exceptional service.
Human resources
- Recruit highly qualified employees and
invest in training that provides them
with the latest technological knowledge
and the capabilities to provide
breakthrough services.
Management Information Systems
- Acquire and develop excellent
information systems that provide up-to-
date market intelligence and real time
information in all areas relevant for
strategic and major operational
decisions.
Value Supply-Chain Management
Chain - Develop and maintain positive relations
Activities with major suppliers. Ensure the receipt
of high quality supplies (raw materials
and other goods).
Operations
- Manufacture high quality goods.
Develop flexible systems that allow
rapid word responses to customers’
changing needs.
Distribution
- Provide accurate and timely delivery of
goods to customers.
Marketing (including sales)
- Build strong positive relationships with
customers. Invest in an effective
promotion and advertising program.
Follow-up service
- Have a specially trained unit to provide
after-sales service. Ensure high
customer satisfaction.
How firms seek to earn above-average return by implementing
the differentiation strategy:
 Rivalry with existing competitors
- Customers tend to be loyal purchasers of products
differentiated in ways that are meaningful to them.
- Loyalty increases = customers become less sensitive
to price increases
- The relationship between brand loyalty and price
sensitivity insulates a firm from competitive rivalry.
- Positive reputations with customers sustain the
competitive advantage of firms using a differentiation
strategy.
- However, firms must be aware of IMITATION.
Example, Samsung and Apple.
 Bargaining Power of Buyers (Customers)
- Reduces customers’ sensitivity to price increases.
- customers are willing to accept a price increase when
a product still satisfies their unique needs better than
does a competitor’s offering.
Example: Macy’s
 Bargaining Power of Suppliers
- Suppliers must provide high quality components.
- However, when outsourcing the entire function, firms
can become dependent and vulnerable to the supplier.
 Potential Entrants
- Customer loyalty and the need to overcome the
uniqueness of a differentiated product creates
substantial barriers to potential entrants.
- Some potential entrants decide to make smaller
investments to see if they can gain a “foothold” (or a
relatively secure position through which competitive
progress is possible) in the market. In these cases, the
firm’s loss to develop a foothold is minimal while
gain could be substantial.
 Product substitutes
- Firms selling brand name products to loyal customers
hold an attractive position relative to product
substitutes.
- Companies without brand loyalty face a higher
probability of customers switching either
a. Products that offer differentiated features that serve
the same function, particularly lower price
b. Products that offer more features and perform
functions that create more value
 Competitive risks of the differentiation strategy
- Customers may decide that the price differential
between the differentiator’s product and the cost
leader’s product is too large.
- A firm’s means of differentiation may cease to
provide value for which customers are willing to pay
or that how the firm seek to differentiate its offerings
is unclear to target customers. (A differentiated
product becomes less valuable if imitated with lower
price.)
- Experience can narrow customers’ perception the
value of a products differentiated features.
(counterfeit through innovation)
- Counterfeiting. Counterfeits have a trademark or logo
that is identical to or indistinguishable from a legal
logo owned by another party, thus infringing the
rights of the legal owner. (Creates distrust and
reduces differentiation)
- Failing to provide crisp and identifiable
differentiation to customers in the form of a firm's
products. E.g., Macy’s department stores (fell short in
satisfying: shareholders – who have seen the value of
their ownership decline, and customers – who are not
frequenting in Macy’s stores to shop)
- Macy’s North Strategy (set of commitments and
actions the firm is taking to improve its execution in
terms of differentiation strategy)
Five components:
1. from familiar to favorite – anticipate customers’
needs and respond to them quickly and effectively by
offering desirable products and enjoyable shopping
experiences
2. must be Macy’s – emphasizing its private brands
as a way to offer value-creating products and services
that are exclusive to Macy’s
3. every experience matters – “competitive
advantage is the ability to combine the human touch
in our physical stores with cutting-edge technology”
 4. funding our future – to have the financial
resources needed to reinvest in innovations that will
create valuable differentiation for customers
5. what’s new, what’s next – this commitment and
actions resulting from it “explores how we innovate
to turn consumer and technology trends to our
advantage and drive growth
firm using a focus strategy is attractive and worthy
of competitive pursuit.
3. the needs of customers within a narrow
competitive segment may become more similar to
those of industry-wide customers as a whole over
time.

NUMBER OF DIMENSIONS ON WHICH FIRMS CAN Integrated Cost Leadership/Differentiation Strategy

DIFFERENTIATE PRODUCTS IS VIRTUALLY
ENDLESS. - Finds a firm engaging simultaneously in primary
value-chain activities and support functions to
Focus Strategies achieve a low-cost position with some product
differentiation.
- Is an integrated set of actions taken to produce
- Efficient production is source of maintaining low
products that serve the needs of a particular segment
cost, while differentiation is the source of creating
of customers.
unique value.
- Firms implementing a focus strategy utilize their core
competencies to serve the needs of a particular
industry segment or niche to the exclusion of others.
- Market segments firms may choose implementing
focus strategy:
1. a particular buyer (e.g., youth or senior)
2. a different segment of product line
3. a different geographic market
- Firms can serve many types of customer need when
using this.
- The essence of focus strategy “is the exploitation of
a narrow target’s differences from the balance of the
industry.”
- Firms using this generally prefer to operate “below
radar.”
- This strategy leads to success when the firm serves a
segment well whose unique needs are so specialized
that broad-based competitors choose not to serve that
segment that exceeds the value created by industry-
wide competitors.

Focused Cost Leadership Strategy

- E.g., IKEA

Focused Differentiation Strategy

- E.g., Green truck and Headquarter (Food Trucks)

- With focus strategy, firms focus on narrow market

segment.

 Competitive Risks of Focus Strategy

- The same set of general risks.
- But there are three additional risks:
1. A competitor may be able to focus on more
narrowly defined competitive segment and thereby
“out-focus” the focuser.
2. Company competing on an industry-wide basis
may decide that the market segment served by the