Chapter 4

Business-Level Strategy
 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.
 Core Competencies and Strategy

Resources and superior capabilities that are sources of

Core
competitive advantage over a firm’s rivals
Competencies

An integrated and coordinated set of actions taken to

Strategy exploit core competencies and gain competitive
advantage

Providing value to customers and gaining competitive

Business-level
advantage by exploiting core competencies in individual
Strategy
product markets
Customers: Their Relationship with Business-Level Strategies
Firms must manage all aspects of their relationship with customers.
Reach: firm’s access and connection to customers
Richness: depth and detail of two-way flow of information between the firm and the customer
Affiliation: facilitation of useful interactions with customers

Who will be
served?

What needs will

Key Issues
in be satisfied?
Business-level
Strategy
How will those
needs be satisfied?
 Who: Determining the Customers to Serve

• Market segmentation
–A process used to cluster people with similar needs into individual and
identifiable groups.

All Customers

Consumer Industrial
Markets Markets
 What: Determining Which Customer Needs to Satisfy

• 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.
 Business-Level Strategy

 Three basic competitive approaches:

1. Cost Leadership- To outperform competitors by doing everything it can to

produce goods or services at the lowest possible cost.

2. Differentiation- The differentiated product has the ability to satisfy a

customer’s need in a way that competitors cannot.

3. Focus- Directed toward serving the needs of a limited customer group or

segment.
 Competitive Advantage and Competitive Scope
Competitive advantage can arise due to two factors: lower cost and differentiation:

i. Lower-cost is based on the competence of an organisation to design, produce, and market a

comparable product more efficiently than its competitors.

ii.Differentiation is the competence of the firm to provide unique and superior value to the
buyer in terms of product quality, special features, or after-sale service.

Competitive scope can be in terms of two factors: broad target and narrow target:

i. Broad targeting: The firm can offer a full range of products / services to a wide range of
customer groups located in widely-scattered geographical area.

ii.Narrow targeting: The firm can choose to offer a limited range of products / services to a few
customer groups in a restricted geographical area.
 Porter's Generic Business Strategies

Broad Overall Broad

COMPETITIVE SCOPE

target
(Where to compete)
Cost leadership differentiation
market

Focussed cost leadership Focussed differentiation

Narrow
target
market

Low-cost Differentiated
products/services Products/services

COMPETITIVE ADVANTAGE
(How to compete)

Source: Adapted from M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985): 12.
 Cost Leadership as a Business Strategy

The basic objective in achieving cost leadership is to ensure that the cumulative costs across the value chain is
lower than that of competitors.

Several actions could be taken for achieving cost leadership:

1. Accurate demand forecasting and high capacity utilisation is essential to realise cost advantages.
2. Attaining economies of scale leads to lower per unit cost of product / service.
3. High level of standardisation of products and offering uniform service packages using mass production
techniques yields lower per unit costs.
4. Investments in cost-saving technologies can help an organisation to squeeze every extra paisa out of the
cost making the product / service competitive in the market.
5. Withholding differentiation till it becomes absolutely necessary is another way to realise cost-based
competitiveness.
 Cost Leadership and the Five Forces

 Rivalry - competitors avoid price wars with cost leaders

 Buyers – shift demand to you, increase market power

 Suppliers – increased market power, absorb cost increases (low cost

position)
 Entrants – entry barriers (scale, learning)

 Substitutes – reinvest profit to maintain advantage

 Conditions under which Cost Leadership is Used

1. The markets for the product / service operate in such a way that price-based competition is
vigorous making costs an important factor.
2. The product / service is standardised and its consumption takes place in such a manner
that differentiation is superfluous.
3. The buyers may be large and possess significant bargaining power to negotiate a price
reduction from the supplying organisation.
4. There is lesser customer loyalty and the cost of switching from one seller to another is low.
This is often seen in the case of commodities or products that are highly standardised.
 Benefits of Cost Leadership

1. Cost advantage is possibly the best insurance against industry competition. An organisation is
protected against the ill effects of competition if it has a lower-cost structure for its products
and services.

2. Powerful suppliers possess higher bargaining power to negotiate price increase for inputs.
Organisations that possess cost advantage are less affected in such a scenario as they can
absorb the price increases to some extent.

3. Powerful buyers possess higher bargaining power to effect price reduction. Organisations that
possess cost advantage can offer price reduction to some extent in such a case.

4. The threat of cheaper substitutes can be offset to some extent by lowering prices.

5. Cost advantage acts as an effective entry barrier for potential entrants who cannot offer the
product / service at a lower price.
 Limitations of Cost Leadership

• Cost advantage is ephemeral. It does not remain for long as competitors can imitate the cost reduction
techniques. Duplication of cost reduction techniques makes the position of cost leader vulnerable from
competitive threats.

• Depending on the industry structure, sometimes less efficient producers may not choose to remain in the
market owing to the competitive dominance of cost leader and scope for product/service may get reduced
affecting the cost leader.

• Technological shifts are a great threat to cost leader as these may change the ground rules on which an
industry operates.
• EX: technological development may lead to the creation of a cheaper process or product which is adopted by
newer competitors. The older players in the industry may be left with an obsolete technology that now proves
to be costlier. In this way, technological breakthroughs can upset cost leadership strategies.
 Differentiation Business Strategy

The key to achieving differentiation is to create value for the customer that is unmatched by the
competitors at the price at which the differentiator organisation offers its products

A differentiated product or service stands apart in the market and is distinguishable by the customers for
its special features and attributes.

Measures that a differentiator organisation can adopt in its product features are:

1. Offer utility for the customer and match her tastes and preferences.
2. Lower the overall cost for the buyer in using the product / service.
3. Raise the performance of the product.
4. Increase the buyer satisfaction in tangible or non-tangible ways.
5. Offer the promise of high quality of product / service.
6. Enable the customer to claim distinctiveness from other customers and enhance her status and prestige among the
buyer community.
 Conditions for Differentiation

The major conditions under which differentiation business strategies could be employed are:
1. The market is too large to be catered to by a few organisations offering a standardised product / service.

2. The customer needs and preferences are too diversified to be satisfied by a standardised product /
service.

3. It is possible for the organisation to charge a premium price for differentiation that is valued by the
customer.

4. The nature of the product / service is such that brand loyalty is possible to generate and sustain.

5. There is ample scope for increasing sale for the product / service on the basis of differentiated features
and premium pricing.
 Benefits for Differentiation

• Organisations distinguish themselves successfully on the basis of differentiation thereby lessening

competitive rivalry. Customer brand loyalty too acts as a safeguard against competitors. Brand
loyal customers are also generally less price-sensitive.

• Powerful suppliers can negotiate price increases that the organisation can absorb to some extent
as it has brand loyal customers typically less sensitive to price increase.

• Powerful buyers do not usually negotiate price decrease as they have fewer options with regard to
suppliers and generally have no cause for complain as they get the special features and attributes
demanded. Owing to its nature, differentiation is a market- and customer-focussed strategy.

• Differentiation is an expensive proposition. Newer entrants are not normally in a position to offer
similar differentiation at a comparable price. As a result differentiation acts as a formidable entry
barrier to new entrants.
 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—youth or senior citizens
– Different segment of a product line—professional craftsmen versus do-it-yourselfers
– Different geographic markets—east coast versus west coast…..south vs north

• 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.
 Factors That Drive Focused Strategies

• Large firms may overlook small niches.

• A firm may lack the resources needed to compete in the broader market.
• A firm is able to serve a narrow market segment more effectively than can its
larger industry-wide competitors.
• Focusing allows the firm to direct its resources to certain value chain activities
to build competitive advantage.
 Competitive Risks of Focus Strategies

• A focusing firm may be “out focused” by its competitors.

• A large competitor may set its sights on a firm’s niche market.

• Customer preferences in a niche market may change to more closely resemble those of the
broader market.
Focused cost leadership and Focused differentiation
 Business Strategies and Internationalisation

• There are four types of international corporate strategies that organisations adopt – international
(IE Companies), multi domestic, global (centralised control), and transnational strategies
(individual controls in countries).

• It must be clear that organisations adopt the business strategies of cost leadership, differentiation
and focus at the international level too.

• Again, leveraging national and organisation-specific advantages play a significant role in

business strategies.

• The model of competitive advantage of nations tells us that four determinants of a nation’s
competitive advantage are: factor conditions, demand conditions, related and supporting
industries, and firm strategy, structure, and rivalry.