Student Version

CHAPTER 4

STRATEGIC Business-Level Strategy

ACTIONS:
STRATEGY
FORMULATION
Strategic Management
Competitiveness and Globalization:
PowerPoint Presentation by Charlie Cook
Concepts and Cases Seventh edition
The University of West Alabama
© 2007 Thomson/South-Western.
All rights reserved. Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
 Business-Level Strategy (Defined)
• An integrated and coordinated set of
commitments and actions the firm uses to gain a
competitive advantage by exploiting core
competencies in specific product markets.

© 2007 Thomson/South-Western. All

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rights reserved.
 The Purpose of a Business-Level
Strategy
• Business-Level Strategies
– Are intended to create differences between the
firm’s position relative to those of its rivals.

• To position itself, the firm must decide

whether it intends to:
– Perform activities differently (melakukan kegiatan
dengan cara berbeda) or
– Perform different activities (melakukan kegiatan
yang berbeda) as compared to its rivals.
© 2007 Thomson/South-Western. All
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rights reserved.
 Business-Level Strategies
• Cost leadership
– Attaining, then using the lowest total cost basis as
a competitive advantage.
• Differentiation
– Using product features or services to distinguish
the firm’s offerings from its competitors.
• Market niche focus
– Concentrating competitively on
a specific market segment.
Copyright © 2001 Houghton
Mifflin Company. All rights 1-4
reserved.
 Types of Potential Competitive
Advantage
• Achieving lower overall costs than rivals
– Performing activities differently (reducing process
costs)
e.g. Southwest airlines
• Possessing the capability to differentiate the
firm’s product or service
– Performing different (more highly valued) activities to
delivering customer value:
e.g. Dell with its direct sales, made-to-order business
model
© 2007 Thomson/South-Western. All
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rights reserved.
 Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service

Lean, Short Haul, Point-to-

Productive Point Routes, Often to
Employees Secondary Airports

Competitive Advantage:
Low Cost
High Frequent,
Aircraft Reliable
Utilization Standardized Schedules
Fleet of Boeing
737 Aircraft
Figure 2.8
© 2011 Pearson Education, Inc.
publishing as Prentice Hall
 Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service

Lean, Short Haul, Point-to-

Productive Point Routes, Often to
Employees Secondary Airports
Automated ticketing machines
Competitive Advantage:
No seat assignments
Low Cost
No baggage transfers
High Frequent,
Aircraft No meals (peanuts) Reliable
Utilization Standardized Schedules
Fleet of Boeing
737 Aircraft
Figure 2.8
© 2011 Pearson Education, Inc.
publishing as Prentice Hall
 Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
No meals (peanuts)
Lean,
Lower gate costs at Short Haul, Point-to-
Productive Point Routes, Often to
secondary airports
Employees Secondary Airports
High number of flights
Competitive Advantage:
reduces employee idleCost
Low time
between flights
High Frequent,
Aircraft Reliable
Utilization Standardized Schedules
Fleet of Boeing
737 Aircraft
Figure 2.8
© 2011 Pearson Education, Inc.
publishing as Prentice Hall
 Activity Mapping at
Southwest Airlines
Courteous,
High number but
of flights
Limited Passenger
reduces employee idle time
Service
between flights
Lean,
Saturate a city with flights, Short Haul, Point-to-
Productive Point Routes, Often to
lowering administrative
Employees Secondary Airports
costs (advertising, HR, etc.)
Competitive
per passenger Advantage:
for that city
Low Cost
Pilot training required on
Highonly one type of aircraft Frequent,
Aircraft Reliable
Reduced maintenance
Utilization Schedules
Standardized
inventory required because
Fleet of Boeing
of only one type ofAircraft
737 aircraft
Figure 2.8
© 2011 Pearson Education, Inc.
publishing as Prentice Hall
 Activity Mapping at
Southwest Airlines
Pilot Courteous, but
training required on
onlyLimited
one Passenger
type of aircraft
Service
Reduced maintenance
Lean, inventory required becauseShort Haul, Point-to-
Productive Point Routes, Often to
Employees of only one type of aircraft
Secondary Airports
Excellent supplier
Competitive relations
Advantage:
with Boeing
Low Costhas aided
financing
High Frequent,
Aircraft Reliable
Utilization Standardized Schedules
Fleet of Boeing
737 Aircraft
Figure 2.8
© 2011 Pearson Education, Inc.
publishing as Prentice Hall
 Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Reduced maintenance
Service
inventory required because
Lean, of only one type of aircraft
Short Haul, Point-to-
Productive Point Routes, Often to
Flexible union
Employees Flexible employeesSecondary
and Airports
contracts standard planes aid
Competitive Advantage:
scheduling
Low Cost
Maintenance personnel
High trained only one type of
Frequent,
Aircraft aircraft Reliable
Utilization Standardized Schedules
20-minute gate turnarounds
Fleet of Boeing
737 Aircraft
Figure 2.8
© 2011 Pearson Education, Inc.
publishing as Prentice Hall
 Activity Mapping at
Southwest Airlines
Automated ticketing
Courteous, but
machines
Limited Passenger
Service
Empowered employees
Lean, High employee
Short Haul, Point-to-
Productive Point Routes, Often to
compensation
Employees Secondary Airports
Hire for attitude, then train
Competitive Advantage:
LowHigh level of stock
Cost
ownership
High High number of flightsFrequent,
Aircraft Reliable
Utilization reduces employee idle time
Schedules
Standardized
Fleetbetween
of Boeing flights
737 Aircraft
Figure 2.8
© 2011 Pearson Education, Inc.
publishing as Prentice Hall
Types of Business-Level Strategies
Competitive Advantage

Cost Uniqueness

Broad Cost Leadership Differentiation

Target

Competitive Integrated Cost

Leadership/
Scope Differentiation

Narrow Focused Cost Focused

Target Leadership Differentiation

© 2007 Thomson/South-Western. All

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rights reserved.
 Low Cost (Cost Leadership)
• Broad target market (e.g. Wal-Mart); budget-sensitive
customers
• Exploits opportunities for cost reduction through
economies of scale and Learning curve (experience
effects) in purchasing and manufacturing, low
expenditures on R&D, marketing and overhead
• If it is applied on a narrow scope ( a small, well defined
market-niche-a particular group of customers): Cost
focus
e.g. Southwest airlines: rute-rute jarak pendek dan lalu lintas
yang padat

© 2007 Thomson/South-Western. All

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rights reserved.
Cost Leadership Strategy: Competitors
Rivalry with • Due to cost leader’s
Existing Competitors
advantageous position:
Threat of
new – Rivals hesitate to compete
entrants
Rivalry on basis of price.
among Bargaining
power of
competing
firms suppliers – Lack of price competition
leads to greater profits.
Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All

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Cost Leadership Strategy: Buyers
Bargaining Power • Can mitigate buyers’
of Buyers power by:
– Driving prices far below
Threat of
new competitors, causing
entrants them to exit, thus
Rivalry
among Bargaining
power of
shifting power with
competing
firms suppliers buyers back to the firm.

Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All

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Cost Leadership Strategy: Suppliers
Bargaining Power • Can mitigate suppliers’
of Suppliers power by:
– Being able to absorb
Threat of
new
cost increases due to
entrants low cost position.
Rivalry
among
competing
Bargaining
power of – Being able to make very
firms suppliers large purchases,
reducing chance of
Threat of Bargaining supplier using power.
substitute power of
products buyers

© 2007 Thomson/South-Western. All

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 Cost Leadership Strategy: New
Entrants
The Threat of • Can frighten off new
Potential Entrants entrants due to:
Threat of – Their need to enter on a
new
entrants
large scale in order to be
Rivalry
Bargaining
cost competitive.
among
power of
competing
firms suppliers – The time it takes to move
down the learning curve.
Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All

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rights reserved.
Cost Leadership Strategy: Substitutes
Product • Cost leader is well
Substitutes positioned to:
Threat of – Make investments to be first
new
entrants
to create substitutes.
Rivalry
among Bargaining – Buy patents developed by
power of
competing
firms suppliers potential substitutes.

Threat of Bargaining
– Lower prices in order to
substitute power of maintain value position.
products buyers

© 2007 Thomson/South-Western. All

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rights reserved.
 Differentiation Strategy
• 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.
– Focus is on nonstandardized products
– Appropriate when customers value differentiated
features more than they value low cost.

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Differentiation Strategy: Competitors
Rivalry with • Defends against competitors
Competitors because brand loyalty to
differentiated product offsets
Threat of price competition.
new
entrants
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All

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rights reserved.
Differentiation Strategy: Buyers
Bargaining Power • Can mitigate buyers’ power
of Buyers because well differentiated
products reduce customer
Threat of sensitivity to price increases.
new
entrants
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All

4–22
rights reserved.
Differentiation Strategy: Suppliers
Bargaining Power • Can mitigate suppliers’
of Suppliers power by:
– Absorbing price increases due
Threat of to higher margins.
new
entrants – Passing along higher supplier
Rivalry
among Bargaining prices because buyers are
power of
competing
suppliers
loyal to differentiated brand.
firms

Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All

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rights reserved.
Differentiation Strategy: New Entrants
The Threat of • Can defend against new
Potential Entrants entrants because:
– New products must surpass
Threat of proven products.
new
entrants – New products must be at least
Rivalry
among Bargaining equal to performance of proven
power of
competing
suppliers
products, but offered at lower
firms
prices.
Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All

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rights reserved.
Differentiation Strategy: Substitutes
Product • Well positioned relative to
Substitutes substitutes because:
– Brand loyalty to a
Threat of differentiated product tends to
new reduce customers’ testing of
entrants
Rivalry
new products or switching
among Bargaining brands.
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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 Value Chain Analysis
• Value Chain: Shows how a product moves from the
raw-material stage to the final customer.

• Allows the firm to understand the parts of its

operations that create value and those that do not.

• A template that firms use to:

– Understand their cost position.
– Identify multiple means that might be used to facilitate
implementation of a chosen business-level strategy.

© 2007 Thomson/South-
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Western. All rights reserved.
 Value Chain Analysis (cont’d)
• Primary activities involved with:
– A product’s physical creation
– A product’s sale and distribution to buyers
– The product’s service after the sale

• Support Activities
– Provide the assistance necessary for the primary
activities to take place.

© 2007 Thomson/South-
3–27
Western. All rights reserved.
 The Value Chain Template
Infrastructure
SUPPORT ACTIVITIES

Human
Resource
Management

Technology
Development

Procurement

PRIMARY
ACTIVITIES

Inbound Operations Outbound Marketing Service

Logistics Logistics / Sales

Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE:
Copyright
Creating and©2006 by Superior
Sustaining South- Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.
Western, a division of
Slide 4-28
Thomson Learning. All rights
 Competitive Advantage
Based on Low-Cost Leadership
Infrastructure Centralized cost controls
SUPPORT ACTIVITIES

Human
Resource Intensive training to emphasize cost savings means;
Management encourage employees to look for new ways to improve methods

Technology Economies of scale of R&D and technology development;

Development learning and experience amortized over large volume

Procurement Purchasing from numerous sources;

strong bargaining power with suppliers

Large Economies of Bulk or Mass marketing; Centralized

PRIMARY shipments; scale in plants; large order mass distribution; service
ACTIVITIES massive experience national ad facilities in
shipment
campaigns
warehouses effects region
Inbound Operations Outbound Marketing Service
Logistics Logistics / Sales

Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE:
Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.
Copyright ©2006 by South-Western, a
division of Thomson Learning. All rights Slide 4-29
reserved.
 Competitive
Advantage Based on Differentiation
Infrastructure Try to coordinate activities tightly among functions;
SUPPORT ACTIVITIES

build quality into organizational practices

Human
Resource Treat employees as special team members;
Management emphasize design incentives to promote quality

Technology Heavy R&D expenditures to make distinctive or even unique products;

Development refinement of high quality manufacturing and technology processes;
emphasis on excellence, world class quality

Procurement Selective purchasing from best or world-class suppliers.

Use of best Extremely Fast delivery Special, High emphasis on

PRIMARY materials, fine quality to distributors; distinctive ads; treating customer
parts and
manufactured extra care in Technical as special
ACTIVITIES workmanship packaging and sales and individual; fast,
components emphasized transport know-how special service

Inbound Operations Outbound Marketing Service

Logistics Logistics / Sales

Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE:
Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.
Copyright ©2006 by South-Western, a
division of Thomson Learning. All rights Slide 4-30
reserved.
 Focus Strategies
• An integrated set of actions taken to produce
goods or services that serve the needs of a
particular competitive segment.
– Particular buyer group—youths or senior citizens
– Different segment of a product line—professional
craftsmen versus do-it-yourselfers
– Different geographic markets—East coast versus
West coast

© 2007 Thomson/South-Western. All

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 Focus Strategies (cont’d)
• Types of focused strategies
– Focused cost leadership strategy
– Focused differentiation strategy
• To implement a focus strategy, firms must be
able to:
– Complete various primary and support activities in
a competitively superior manner, in order to
develop and sustain a competitive advantage and
earn above-average returns.
© 2007 Thomson/South-Western. All
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rights reserved.
 Integrated Cost Leadership/
Differentiation Strategy
• A firm that successfully uses an 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.

© 2007 Thomson/South-Western. All

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rights reserved.
 Integrated Cost Leadership/
Differentiation Strategy (cont’d)
• Commitment to strategic flexibility is
necessary for implementation of integrated
cost leadership/differentiation strategy.
– Flexible manufacturing systems (FMS)
– Information networks
– Total quality management (TQM) systems

© 2007 Thomson/South-Western. All

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 Competitive Advantage
• Sustainability of a competitive advantage is a
function of:
– The rate of core competence obsolescence due to
environmental changes.
– The availability of substitutes for the core
competence.
– The difficulty competitors have in duplicating or
imitating the core competence.

© 2007 Thomson/South-Western. All

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rights reserved.