AB3602

Strategic Management

Week 5 - Business-level Strategy

Caleb Tse
Strategy, IB and Entrepreneurship Division
Nanyang Business School
Nanyang Technological University
AY2023-24 S2
 Agenda
Explain Porter’s Generic Business-level Strategies
• What is Business Strategy?
• Strategic Business Units
• Business Strategy Choice – 2 Dimensions (Scope & Advantage)
• Business Models
• 5 Generic Strategies
• Determining Business-level Strategies
• Competitor Analysis – Market Commonality & Resource Similarity

REC Solar Case Questions Released on NTU Learn

Strategic Management Framework
What is Business Strategy?
❖ How to compete in an industry or industry segment?
❖ Making choices about one’s products/services and activities that are
intended to create differences between the firm’s competitive
position relative to those of its rivals
❖ The firm’s competitive position should lead to a competitive
advantage over rivals (i.e., above-average returns)

A business-level strategy is an integrated and coordinated set of

commitments and actions designed to provide value to customers
and to gain a competitive advantage by utilizing core competencies
in specific individual product markets
 Recall Strategic Management Process

FORMULATION /
ANALYSIS IMPLEMENTATION
STRATEGIC CHOICES

Strategic Business
Corporate level
Unit (SBU) level

Product / market /
distinctive competence
domain
Supplies goods or services for a
distinct domain of activity
Business Strategy

Rothaermel, 2017
 Strategic Business Units

• Supplies goods and services for a distinct domain of activity

• Sometimes called “divisions” or “profit centres”
• Typically, each SBU has responsibility for its own business strategy
• Examples of SBUs:
• Microsoft: entertainment and devices, online services, servers and tools,
windows and windows live etc
Strategic Business Units: Example

SBU

Power rangers
Toys and hobby
Tamagotchi
Corporate
Arcade games
Game contents
Creation of games

Sales

Animation
Visual and music
Music publishing
 Strategic Business Units:
Core Functions & Key Choices

• Decentralization
• No need to continuously seek approval from corporate
• Information asymmetry between SBU and HQ
• Localization
• Adjusting business strategies according to local environment
• Corporate may be too distant to do this effectively
• Accountability
• SBU managers responsible for the success/failure of their strategies (i.e., market
share, profitability, sales etc.)

Key choices by SBU: Consumer to serve in an industry/segment → who,

what, and how?
Key choices by SBU: Competitive advantage source → strategic position
 First Dimension: Competitive Scope
Consumer Segmentation – Who, What, & How

A market segment is a group of Some bases of market segmentation

customers who have similar
needs that are different from
customer needs in other parts
of the market

• Give rise to understanding

consumers’ need: What – Value
creation as the foundation
• And firms need to think: How – Can
they do it? Core competency
 Second Dimension: Competitive Advantage
Strategic Position

• The greater the economic value created (V – C), the greater

the potential to achieve a competitive advantage
• A firm’s business-level strategy determines its strategic
position (also referred as competitive position)

• Business strategy is more likely to lead to competitive

advantage if it allows firms to either
• Perform similar activities differently, or
• Perform different activities than their rivals
 Value Created (V-C) & Profitability

Perceived
Value (V):
Willingness to
pay (WTP) Consumer
Value Surplus
created =V-P
Price (P)
=V-C
Profit
=P-C

Cost (C)
Business Models
❖ Business models are part of a comprehensive business-level
strategy.
❖ A business model influences strategy implementation, especially in
terms of the interdependent processes the firm uses during
implementation.
❖ A business model describes what a firm does to create, deliver, and
capture value for its stakeholders.

❖ Business model innovation occurs when a firm determines

that its current business model is outdated and successfully
replaces it with a newer one.
Business Models
❖ Firms select from many different business models:
❖ Freemium model
❖ Advertising model
❖ Peer-to-peer model
❖ Franchise model
❖ Subscription model
❖ Digital platform model
 Business Model ≠ Strategy

• A BM does not directly consider competitors

• Strategy’s job is to deal with competitors

• Sam Walton: ‘Wal-Mart’s key strategy was to put good-sized stores into little
one-horse towns which everybody else was ignoring’
• The ‘how to’ operate a supermarket (or recipe to operate the system) had been
around for years before Wal-Mart
 Business Model

• Effective Business Model – Two Steps

1. Formulate
Managers transform their strategy of how to compete into a blueprint of actions and
initiatives that support the overarching goals
2. Implement
Managers implement this blueprint through structures, processes, culture, and
procedures
• If translation into a profitable business model fails, the firm will most likely fail
• How a firm does business could be more critical to its competitive advantage, than what
the firm does
 Dynamic Nature of Business Models

• Business models can be combined

• Business models can evolve
• Business models can be disrupted
• Businesses must respond to disruption and adapt
• Legal conflicts can arise
 Business Model: Netflix Example

• Netflix’s BM is to grow its global user base as large as possible and

then make money via monthly subscription fees
• Cost of a large library is more or less fixed. The unit cost falls, however, as
more users join
• By Q4 of 2023 : 260 million subscribers worldwide
• What about competition?
• It is not very difficult for some to imitate this: Amazon Prime, Hulu
• Now Netflix is turning to producing and distributing original
contents
 Generic Strategy or Business Strategy
Strategic
Combining two dimensions Position

Five Business-Level Strategies

Competitive
Scope
 Generic Business Strategy

❖ Strategies that can be used, independent of the industry,

by different types of firms
• Universal strategies
• Can be used by manufacturing or service firms
• Can be used by large or small, public or private firms
❖ As with any strategy, generic strategies aim at achieving
competitive advantage
Definitions
❖ Cost Leadership Strategy:
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.
❖ Low cost: not low price
❖ Differentiation Strategy:
An integrated set of actions taken to produce goods and services
that customers perceive as being different in ways that are
important to them
❖ Perceive: not think (with rationality)

21
Generic Strategy or Business Strategy
Comparison of Cost Leadership and Differentiation Strategies
Cost Leadership Differentiation

Business Model At the lowest price At a premium price

Strategy At the lowest cost At the highest real and perceived value

Lower the price to the highest level of Raise the price to the highest
the largest market scale willingness to pay of the largest market
scale

Product/Service Standard Unique

Brand
Emphasis Efficiency Effectiveness

Improve operation excellence and cost Effective branding, advertising, unique

control design, outstanding quality and service,
Minimize marketing, R&D, etc. etc.
22
 Cost Leadership Strategy

❖ This strategy’s goal is to reduce cost below that of competitors (while

offering adequate value/differentiation)
• Helps the firm to charge lower prices when compared to competitors or charge
same price but receive higher profit potential
❖ Competitive advantage is achieved when the economic value created (V-C)
is greater than that of competitors
❖ Managers can manipulate cost drivers to keep their costs low
❖ Some cost drivers:
• Cost of input factors
• Economies of scale
• Learning-curve & experience-curve effects
• Product characteristics: Choices, designs, and production techniques
• Other: Capacity utilization and efficiency, and more, depending on the situation
 Cost Leadership Strategy

Some cost Input Economies Learning Experience

drivers factors cost of scale curve effect curve effect

This is the
challenge: To
maintain an
acceptable level
of differentiation

Rothaermel, 2017
 Cost Leadership Strategy

Example: Southwest airline

❖ Extreme operation efficiency and cheaper inputs enabling low-cost
❖ Trainings specifically targeting on learning of operators, flight attendants, and
other personnel
 Cost Driver: Economies of Scale

❖ Economies of scale
• They exist when the cost per unit decreases as the
output increases.

Spread fixed
costs over
large output

Rothaermel, 2017
 Cost Driver:
Learning and Experience Curve
❖ Learning and Experience curve effects

Rothaermel, 2017

Learning curve effect: As the

cumulative output increases, the
cost per unit decreases.

Experience curve effect:

Captures both learning effects
and process improvements.

-Increased individual skills

-Improved organizational
routines
 Cost Leadership - Value Chain Activities

Sources: Based on M. E. Porter, 1998, Competitive Advantage: Creating and Sustaining Superior Performance, New York, The Free Press; D. G. Sirmon, M. A. Hitt, & R. D. Ireland, 2007, Managing firm resources in
dynamic environments to create value: Looking inside the black box, Academy of Management Review, 32: 273–292; D. G. Sirmon, M. A. Hitt, & B. A. Gilbert, 2011, Resource orchestration to create competitive advantage:
Breadth, depth and life cycles effects, Journal of Management, 37, 1390–1412; J. S. Harrison, 2020, Sustaining High Performance in Business: Systems, Resources, and Relationships, New York, Business Expert Press.
 Differentiation Strategy

❖ The goal: to add unique features that will increase the perceived
value of goods and services (at an acceptable cost)
• Focus on unique features, new products or marketing campaigns.
• Helps the firm charge higher prices, while trying to keep the cost structure
low
❖ Competitive advantage is achieved when the economic value
created (V-C) is greater than that of competitors
❖ Differentiation helps a firm to protect itself from competition
because customers have preferences and loyalties to certain sellers
Differentiation Strategy

This is the
challenge: To
contain cost while
increasing value

Rothaermel, 2017
 Differentiation Strategy:
Differentiation (Value) Drivers

• Some differentiation (Value) drivers

• Product features: Performance, technology, quality, and more
• Complements: Ecosystem-based service
• Consumer services: Experience, delivery time, warranty
• Intangible features: Reputation/image, affiliation, ESG consideration
• Key is to create the “perception” of differentiation
• Technical specification alone unlikely to bring sustainable advantage
• Need other dimensions that shape perception than innovations
• Bad experience deters future businesses
 Differentiation Strategy - Value Chain Activities

Sources: Based on M. E. Porter, 1998, Competitive Advantage: Creating and Sustaining Superior Performance, New York, The Free Press; D. G. Sirmon, M. A. Hitt, & R. D. Ireland, 2007, Managing firm resources in dynamic
environments to create value: Looking inside the black box, Academy of Management Review, 32: 273–292; D. G. Sirmon, M. A. Hitt, & B. A. Gilbert, 2011, Resource orchestration to create competitive advantage: Breadth, depth
and life cycles effects, Journal of Management, 37, 1390–1412; J. S. Harrison, 2020, Sustaining High Performance in Business: Systems, Resources, and Relationships, New York, Business Expert Press.
Generic Business Strategy & Five Forces
 Risks of Cost Leadership

❖ A loss of competitive advantage to newer technologies.

❖ A failure to detect changes in customers’ needs.
❖ The ability to imitate the cost leader’s competitive advantage
through competitors’ own distinct strategic actions.

34
Risks of Differentiation
❖ A customer group’s decision that a differentiated product’s
unique features are no longer worth a premium price.
❖ The inability of a differentiated product to create the type of
value for which customers are willing to pay a premium price.
❖ The ability of competitors to provide customers with products
that have features similar to those of the differentiated product
but at a lower cost.
❖ Counterfeiting
❖ The failure of a firm to meet customers’ expectations through its
efforts to implement the differentiation strategy.
35
Focused & Integrated Strategies

36
Definitions
❖ Focus Strategy:
An integrated set of actions taken to produce goods or services
that serve the needs of a particular competitive segment
❖ Define the market, today, usually refers to defining a unique segment

❖ Integrated Strategy:
Engaging in primary value chain activities and support functions
that allow a firm to simultaneously pursue low cost and
differentiation

37
 Focus Strategies

Involves: the same basic approach as Broad Market Strategies

• However, opportunities may exist because:

• Market segment requires more “intangible” approach
• Large firms may overlook small niches
• Firm may lack resources to compete industry-wide
• May be able to serve a narrow market segment more effectively than
industry-wide competitors
• Focus can allow you to direct resources to certain value chain activities
to build competitive advantage
• Focused Differentiators may thrive by selecting a small market that is
underserved by large players
 Focus Strategies
❖ Relies heavily on:
• Understanding distinct segment needs
❖ If clear segments begin disappearing, it becomes harder to defend
this segment against competitors
❖ i.e. Competition among smartphones: BlackBerry vs Apple and Nokia
• Viable segment economics
❖ Making sure segments do not become too narrow and endanger
profitability
• Advantages through effective use of value chain and production
❖ Making sure value chains and production are either too costly or too
difficult to construct for competitors
❖ i.e. Ariel vs Ecover: Achieving same level of eco-friendliness would
require substantial changes to buying and production processes
 Focused Cost Leadership Strategy

Example: Ryanair – Lower Cost than the Low-Cost Leader

❖ Ryanair has unbundled air travel to its extreme and only serves a small region
❖ More than 20% of Ryanair’s revenues flow from ancillary services: premium-
rate phone line to contact them, checked bags, checking in, pillows, blankets,
water
❖ Ryanair offers the basic service (air travel only) for a low price, but charges a
steep premium for all other items and upgrades

Another
Example
 Focused Differentiation Strategy

Example: Razer – Founded by a Singaporean in 2005

❖ Niche market: “For gamers, by gamers”
❖ Differentiation? Technology, quality, design, integrated ecosystem, great service,
community
Risks of Focus Strategy
❖ A competitor’s ability to use its core competencies to “out-focus”
the focuser by serving an even more narrowly defined market
segment
❖ An industry-wide company’s decision that the market segment
served by the firm using a focus strategy is attractive and worthy
of competitive pursuit
❖ A reduction in differences of the needs between customers in a
narrow market segment and the industry-wide market over time

42
 Integrated Strategy

❖ Combination of Cost Leadership and Differentiation

❖ It requires firms to reconcile the trade-offs between the two
different strategic positions
• Difficult because the firm manages internal value chain activities that
are fundamentally different from one another
❖ Integration can work if investments are not substitutes but rather
complements
❖ The goal is larger (V – C) compared to both cost leadership and
differentiation rivals
Integrated Strategy

Rothaermel, 2017
 Integrated Strategy: Dual Advantage?
RISK: Stuck in the Middle!

❖ Not quite a cost leader, not quite a differentiator

❖ Trade off between:
• Need for efficiency
• Lowest cost competitors can always undercut prices
• Cost leader making halfhearted attempts at differentiation can be a recipe for disaster
• Need for effectiveness/customization
• For differentiator, it makes no sense to compromise quality by focusing too much on
economies
❖ Firms stuck in the middle:
❖ Compete at a disadvantage
❖ Are unable to earn more than average returns
 Summary on Generic Business Strategy:
Porter’s Suggestion and Controversies

Porter suggests:
❖ It is best to choose whichever generic strategy to adopt and then stick
rigorously to it
❖ Failure to do this leads to a danger of being ‘stuck in the middle’ i.e.
doing no strategy well

The argument for pure generic strategies is controversial.

Even Porter acknowledges that the strategies can be combined… (e.g., if being
unique, costs nothing)
 Combining the Generic Strategies:
Potential Success

❖ A company can create separate strategic business units each pursuing

different generic strategies and with different cost structures
❖ Technological or managerial innovations where both cost efficiency
and quality are improved

❖ Competitive failures – if rivals are similarly ‘stuck in the middle’ or if

there is no significant competition then ‘middle’ strategies may be OK.
 Airline Industry:
Example of All Business Strategies
Determining Business-level Strategy

49
Determining Business-level Strategy 1
❖ Understand the value drivers of the customers
❖ Conduct Market Segmentation
❖ Group customers based on their value drivers (i.e., important and
significant differences in their needs, attitudes, and buying practices)
❖ Consumer buyers (e.g., demographics, socioeconomic, consumption patterns,
etc)
❖ Industrial buyers (e.g., size, geography, end-use, etc)
❖ After market segmentation, the firm can:
❖ develop a product to suit the needs of each customer grouping OR
❖ concentrate on one customer grouping

50
Determining Business-level Strategy 2
❖ Examine the attractiveness of the segment(s)
❖ Attractiveness of Market Segments
❖ Tools in external environment analyses will be useful in determining
environmental opportunities and threats and, thus, segment
attractiveness. For instance
❖ Porter’s Five Forces Model
❖ General Environment Analysis
❖ Generally, a firm should choose to compete in a more attractive
market segment or segments (provided the firm has the necessary
resources and capabilities to have a sustainable competitive advantage
in that segment or segments)

51
Determining Business-level Strategy 3
❖ Examine internal strengths and weaknesses
❖ Based on the value drivers of the customer segment and results of the
external analyses (e.g., opportunities and threats of that segment), a firm
should determine what is the most appropriate business strategy to
compete in that segment.
❖ Assessment of Internal Strengths and Weaknesses
❖ Feasibility Test:
Does the firm have the available resources/capabilities to execute the intended
business strategy?
❖ Test of Sustainable Competitive Advantage:
Do those resources/capabilities provide a sustainable competitive advantage?

52
Quantitative analysis
to supplement evaluation of business strategy

❖ Commonly used measures of Profitability such as

❖ Return on Equity (ROE)
❖ Return on Assets (ROA)
❖ EBIT Margin
❖ Gross Margin
❖ Net Margin
❖ Earnings per Share (EPS)

53
 Model of Competitive Rivalry

Source: Adapted from M. J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration, Academy of Management Review, 21: 100–134.

54
Market Commonality
❖ Market commonality is concerned with the number of markets with which
the firm and a competitor are jointly involved and the degree of importance
of the individual markets to each.
❖ Firms competing against one another in several markets engage in
multipoint competition.
❖ In general, multipoint competition reduces competitive rivalry, but some
firms will still engage in attacks when the potential rewards (e.g., potential
market share gain) are high.

55
Resource Similarity
❖ Resource similarity is the extent to which the firm’s tangible and intangible
resources compare favorably to a competitor’s in terms of type and amount.
❖ Firms with similar types and amounts of resources tend to:
❖ Have similar strengths and weaknesses.
❖ Use similar strategies in light of their strengths to pursue what may be similar
opportunities in the external environment.

56
Competitor Analysis

57
See you next week