Chapter 4

Business-Level Strategy

Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson

©2000 South-Western College Publishing

Ch4-1
 Learning Objectives

1. Define business-level strategy.

2. Discuss the relationship between customers
and business-level strategies in terms of
who,what, and how.
3. Explain the differences among business-
level strategies.

Ch4-2
 Learning Objectives Continued

4. Use the five forces of competition model to

explain how above-average returns can be
earned through each business-level
strategy.
5. Describe the risks of using each of the
business-level strategies.

Ch4-3
 Chapter 2
Strategic External
Environment
The Strategic
Inputs
Strategic Intent
Strategic Mission
Management
Chapter 3
Internal Process
Environment

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Strategic
Competitiveness
Above Average
Feedback
Returns
Ch4-4
 Chapter 2
External Environment
Sustainable
Competitive
Chapter 3 Advantage
Internal Environment

Chapter 4
Business Level
Strategy
Ch4-5
 The resources and capabilities
Core that have been determined to
Competency be a source of competitive
advantage for a firm over its
rivals.

Ch4-6
Core The resources and capabilities that have been
Competency determined to be a source of competitive
advantage for a firm over its rivals.

An integrated and coordinated

set of actions taken to exploit
Strategy
core competencies and gain a
competitive advantage.

Ch4-7
Core The resources and capabilities that have been
Competency determined to be a source of competitive
advantage for a firm over its rivals.

An integrated and coordinated set of

Strategy actions taken to exploit core competencies
and gain a competitive advantage.

Actions taken to provide value to

Business customers and gain a competitive
Level advantage by exploiting core
Strategy competencies in specific,
individual product markets.
Ch4-8
 Three dimensions of firms’
relationships with customers

1. Reach: firm’s access and connection to

customers
2. Richness: depth and detail of two-way
flow of information between the firm
and the customer
3. Affiliation: facilitation of useful
interactions with customers
Ch4-9
 Customer Needs—Who?

Determining the Customers to Serve

Consumer Customers Industrial

Markets Markets

Market Segmentation

10
Ch4-10
Basis for Customer Segmentation
Consumer Markets
1. Demographic factors (age, income, sex, etc.)
2. Socioeconomic factors
(social class, stage in the family life cycle)
3. Geographic factors
(culture, region or country differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns
(heavy, moderate, and light users)
6. Perceptual factors
(benefit segmentation, perceptual mapping)
7. Brand loyalty patterns
Ch4-11
Basis for Customer Segmentation
Industrial Markets
1. End use segments (identified by SIC code)
2. Product segments (based on technological differences
or production economics)
3. Geographic segments (defined by boundaries
between countries or by regional differences within
them)
4. Common buying factor segments (cut across
product/market and geographic segments)
5. Customer size segments

Ch4-12
 Customer Needs—What?

 Customer needs are related to a

product’s benefits and features
 Customer needs are neither right nor
wrong, good nor bad
 Customer needs represent desires in
terms of features and performance
capabilities

13
Ch4-13
 Customer Needs—How?

 Firms use core competencies to

implement value creating strategies
that satisfy customers’ needs
 Only firms with capacity to
continuously improve, innovate and
upgrade their competencies can
expect to meet and/or exceed
customer expectations across
time
14
Ch4-14
 Business Level Strategy

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

The purpose of which is to create differences

between the firm’s position and those of its
competitors

Ch4-15
 Business-Level Strategy

Key Issues
Which good or
service to provide

Business-level How to
Strategy manufacture it

How to
distribute it

16
Ch4-16
Five Business-Level Strategies

Ch4-17
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of
Competitive
Scope
Focused
Narrow Focused
Target Differen-
Market Low Cost
tiation
Ch4-18
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of Integrated
Competitive Low Cost/
Scope Differentiation
Narrow Focused Focused
Target Differen-
Market Low Cost
tiation
Ch4-19
Cost Leadership Business Level Strategy

Key Criteria:

Relatively standardized products

Features acceptable to many customers

Lowest competitive price

Ch4-20
Cost Leadership Business Level Strategy
Requirements:
Constant effort to reduce costs through:

Building efficient scale facilities

Tight control of production costs and overhead
Minimizing costs of sales, R&D and service
State of the art manufacturing facilities
Monitoring costs of activities provided by outsiders
Simplification of processes

Ch4-21
 How to Obtain a Cost Advantage

1. Determine and Control Cost Drivers

2. Reconfigure the Value Chain as needed

Alter production process New raw material

Change in automation Forward integration
New distribution channel Backward integration
New advertising media Change location relative
Direct sales in place of to suppliers or buyers
indirect sales

Ch4-22
 Reconfiguring the Value Chain
of Iowa Beef Packers (IBP)
Old Ship “on the Slaughter
Ranch “Boxed
Way: Hoof” to Rail into sides
Cattle Cuts” at
Center of beef
Markets
(Chicago)

New
New Locate large Ship cuts
Process into
Way: automated already
Way “Boxed Cuts” at
plants near “Boxed” to
plants
ranches Markets

Save on shipping and cattle weight loss

Utilize cheaper non-union rural labor
Ch4-23
 Choices That Drive Costs
Economies of scale Product features
Asset utilization Performance
Capacity utilization pattern Mix & variety of products
- Seasonal, cyclical Service levels
Interrelationships Small vs. large buyers
- Order processing
and distribution Process technology

Value chain linkages Wage levels

- Advertising & Sales Product features
- Logistics & Operations
Hiring, training, motivation
Ch4-24
 Three Key Questions

1. How can an activity be performed

differently or even eliminated?

2. How can a group of linked value

activities be regrouped or reordered?

3. How might coalitions with other

firms lower or eliminate costs?

Gallo sold wine through grocery stores rather than liquor

stores because they were more efficient distributors
Ch4-25
Effective Cost Leaders can remain
profitable even when the
Five Forces appear unattractive

Ch4-26
Effective Cost Leaders can remain profitable even when
the Five Forces appear unattractive

Threat of
New
Entrants

Can frighten off New Entrants

due to the need to:

* Enter at large scale to

be Cost Competitive
* Take time to move down
the “Learning Curve”
Ch4-27
Effective Cost Leaders can remain profitable even when
the Five Forces appear unattractive

Can frighten off New Entrants due

Threat of to the need to:
New * Enter at Large Scale to be
Cost Competitive
Entrants
* Take time to move down the
“Learning Curve”

Can mitigate Buyer Power by: Bargaining

Power of
* Driving prices far below competitors Buyers
may cause exit and shift power back
to firm

Ch4-28
 Effective Cost Leaders can remain profitable even when
the Five Forces appear unattractive

Can frighten off New Entrants due

Well positioned relative toThreat
New
of to the need to:
* Enter at Large Scale to be
Substitutes in order to: Entrants Cost Competitive
* Take time to move down the
* Make investments to create “Learning Curve”
substitutes first
* Buy patents developed by
Bargaining
potential substitutes Power of
Buyers
* Lower prices to maintain
value position
Can mitigate Buyer Power by:

Driving prices far below

Threat of competitors which may
cause exit and shift power
Substitute back to firm
Products
Ch4-29
 Effective Cost Leaders can remain profitable even when
the Five Forces appear unattractive

Can frighten off New Entrants due

Threat of to the need to:
Bargaining New * Enter at Large Scale to be
Cost Competitive
Power of Entrants
* Take time to move down the
Suppliers “Learning Curve”

Can mitigate Supplier Power by: Bargaining

Power of
Buyers
* Low cost position makes them better
able torelative
Well positioned absorb
to cost increases Can mitigate Buyer Power by:
Substitutes in order to:
* More likely to make very large purchases
* Make investments to create substitutes
Threat of
Driving prices far below
competitors which may
* which reduces chance Substitute
Can buy patents developed by of supplier power
cause exit and shift power
potential substitutes
back to firm
* Lower prices to maintain Products
value position Ch4-30
 Effective Cost Leaders can remain profitable even when
Competitors avoid
the Five Forces appear unattractive
price wars with Cost
Can mitigate Supplier Power by: Leaders,
Can frighten offwhich
New Entrants due
Threat of creates higher
to the need to: profits
* Low cost position makes them
better able to absorb cost increases New * Enter at Large Scale to be

* More likely to make very large Entrants for entire

Cost industry
Competitive
* Take time to move down the
purchases which reduces chance “Learning Curve”
of supplier power

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Well positioned relative to Can mitigate Buyer Power by:

Substitutes in order to:
* Make investments to create substitutes Driving prices far below
Threat of competitors which may
* Can buy patents developed by Substitute cause exit and shift power
potential substitutes back to firm
* Lower prices to maintain Products
value position Ch4-31
Major Risks of Cost Leadership
Business Level Strategy

Dramatic technological change could take

away your cost advantage

Competitors may learn how to imitate

Value Chain

Focus on efficiency could cause Cost Leader

to overlook changes in customer preferences
Ch4-32
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost
Target
Market Leadership
Breadth of
Competitive
Scope
Narrow
Target
Market

Ch4-33
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of
Competitive
Scope
Narrow
Target
Market

Ch4-34
Differentiation Business Level Strategy
Key Criteria:

Value provided by unique features

and value characteristics

Command premium price

High customer service
Superior quality

Prestige or exclusivity

Rapid innovation
Ch4-35
Differentiation Business Level Strategy
Requirements:
Constant effort to differentiate products through:
Developing new systems and processes

Shaping perceptions through advertising

Quality focus

Capability in R&D

Maximize Human Resource contributions

through low turnover and high motivation
Ch4-36
Differentiation Business Level Strategy
Effectiveness with Differentiation
grows out of Value Chain activities
Examples:

Heineken beer Raw materials

Steinway pianos Raw materials & Workmanship

Mercedes Benz autos Technology and Workmanship

Intel microprocessors Technological superiority

Caterpillar tractors Service buyers’ needs quickly

anywhere in the world
Ch4-37
Create Value with Differentiation by:

Lowering Buyers’ Costs

Raising Buyers’ Performance

Creating Sustainability through:

• Creating barriers by perceptions of uniqueness
• Creating switching costs through differentiation

Ch4-38
Drivers of Differentiation
Examples:

Unique product features

Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
Ch4-39
Effective Differentiators can remain
profitable even when the
Five Forces appear unattractive

Ch4-40
Effective Differentiators can remain profitable even
when the Five Forces appear unattractive
Threat of
New
Entrants

Can fend off New Entrants

because:

* New products must

surpass proven products
* Or be equal to performance
at lower prices
Ch4-41
Effective Differentiators can remain profitable even
when the Five Forces appear unattractive
Can fend off New Entrants because:
Threat of New products must
*
New surpass proven products
Entrants * Or be equal to performance
at lower prices

Can mitigate Buyer Power because: Bargaining

Power of
Well differentiated products reduce Buyers
customer sensitivity to price increases

Ch4-42
Effective Differentiators can remain profitable even
when the Five Forces appear unattractive
Can fend off New Entrants because:
Threat of New products must
*
New surpass proven products
Entrants * Or be equal to performance
at lower prices
Well positioned relative to
Substitutes because:
Bargaining
* Brand loyalty tends to Power of
reduce new product trial Suppliers
and brand switching
Can mitigate Buyer Power
because well differentiated
Threat of products reduce customer
Substitute sensitivity to price increases
Products
Ch4-43
Effective Differentiators can remain profitable even
when the Five Forces appear unattractive
Can fend off New Entrants because:
Threat of New products must
*
New surpass proven products
Entrants * Or be equal to performance
at lower prices

Bargaining Can mitigate Supplier Power by:

Power of
Suppliers
* Absorbing price increases dueBargaining
to
higher margins Power of
Well positioned relative to Suppliers
* Passing on higher supplier prices
Substitutes because:

because
* Brand buyers
loyalty tends to
reduce new product trial
are brand loyal
Can mitigate Buyer Power
and brand switching
Threat of because well differentiated
products reduce customer
Substitute
sensitivity to price increases
Products
Ch4-44
Effective Differentiators can remain profitable even
when the Five Forces appear unattractive

Can mitigate Supplier Power by:

Threat of Can fend off New Entrants because:
Absorbing price increases
*
due to higher margins
New Brand
New
loyalty
products must
*
*
Entrants overcomes much
surpass proven products
Passing on higher supplier prices
because buyers are brand loyal * Or be equal to performance
price competition
at lower prices

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Buyers in Industry Suppliers

Well positioned relative to

Substitutes because: Can mitigate Buyer Power
Threat of because well differentiated
* Brand loyalty tends to products reduce customer
reduce new product trial Substitute sensitivity to price increases
and brand switching Products
Ch4-45
Major Risks of a Differentiation
Business Level Strategy

Customers may decide that the

cost of “uniqueness” is too great

Competitors may learn how to

imitate Value Chain

The means of uniqueness may no

longer be valued by customers
Ch4-46
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of
Competitive
Scope
Narrow
Target
Market

Ch4-47
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of
Competitive
Scope
Narrow Focused Focused
Target Differen-
Market Low Cost
tiation
Ch4-48
 Focused Business Level Strategies
Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.
However, opportunities may exist because:

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 industrywide competitors

Focus can allow you to direct resources to certain

value chain activities to build competitive advantage
Ch4-49
 Focused Business Level Strategies
Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.
However, opportunities may exist because:

May be able to retrofit old factories to keep costs

down
Minimize R&D costs by copying innovators
Examples:
Bang & Olufsen Upscale electronic components
Snap-on tools High quality mechanics’ tools

Iams Company Premium pet foods

Ch4-50
 Focused Business Level Strategies
Focused Business Level Strategies involve the same basic
approach as Broad Market Strategies.
However, opportunities may exist because:

Focused Differentiators may thrive by selecting a

small market that is underserved by large players

Example:
Custom manufacturers of parts for
Harley-Davidson motorcycles

Ch4-51
Major Risks Involved With a Focused
Differentiation Business Level Strategy

Firm may be “outfocused” by competitors

Large competitor may set its sights on your

niche market

Preferences of niche market may change to

match those of broad market
Ch4-52
 Generic Business Level Strategies
Source of Competitive Advantage

Cost Uniqueness

Broad Cost Differen-

Target
Market Leadership tiation
Breadth of Integrated
Competitive Low Cost/
Scope Differentiation
Narrow Focused Focused
Target Differen-
Market Low Cost
tiation
Ch4-53
Integrated Low Cost/Differentiation Strategy
Firms using an Integrated Strategy may:
Adapt more quickly
Learn new skills and technologies

Utilize Flexible Manufacturing Systems to create

differentiated products at low costs
Leverage core competencies through Information
Networks across multiple business units

Utilize Total Quality Management (TQM) to

create high quality differentiated products which
simultaneously driving down costs
Ch4-54
Integrated Low Cost/Differentiation Strategy

Recognize that the Integrated Low Cost/

Differentiation business level strategy involves a
Compromise

The risk is that the firm may become “Stuck in

the Middle” lacking a strong commitment to or
expertise with either type of generic strategy

Ch4-55
Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Low Cost Differentiation
Use a single aircraft model
Focus on customer
(Boeing 737)
satisfaction
Use secondary airports
High level of employee
Fly short routes dedication
No meals
New flight services for
15 minute turnaround time
business travelers
No reserved seats (phones and faxes)
No travel agent reservations
Ch4-56