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Chapter 4
Chapter 4
CHAPTER
Business-Level Strategy
LEARNING OBJECTIVES
Studying this chapter should provide you with the strategic management
knowledge needed to:
1 Discuss the relationships between customers and business-level
strategies in terms of who, what, and how.
2 Explain the purpose of forming and implementing a business-level
strategy.
3 Describe business models and explain their relationship with business- level
strategies.
4 Explain the differences among five types of business-level strategies.
5 Use the five forces of competition model to explain how firms can earn
above-average returns when using each business-level strategy.
6 Discuss the risks associated with using each of the business-level
strategies.
Chapter Introduction (slide 1 of 3)
• By selecting and implementing one or more strategies, firms seek to:
• Gain strategic competitiveness
• Earn above-average returns
• Strategies:
• Are purposeful
• Develop before firms engage rivals in marketplace competitions
• Demonstrate a shared understanding of the firm’s vision and mission
• A strategy that is consistent with the conditions and realities of a
firm’s external and internal environments marshals, integrates, and
allocates available resources, capabilities, and competencies to align
them properly with opportunities in the external environment.
• When effective, a strategy rationalizes the firm’s vision and mission
along with the actions taken to achieve them.
Chapter Introduction (slide 2 of 3)
Consumer Markets
1. Demographic factors (age, income, sex, etc.)
2. Socioeconomic factors (social class, stage in the family life cycle)
3. Geographic factors (cultural, regional, and national differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns (heavy, moderate, and light users)
6. Perceptual factors (benefit segmentation, perceptual mapping)
Table 4.1
Basis for Customer Segmentation (slide 2 of 2)
Industrial Markets
1. End-use segments (identified by Standard Industrial Classification [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
Source: Based on information in S. C. Jain, 2009, Marketing Planning and
Strategy, Mason, OH: South-Western Cengage Custom Publishing.
4-1d What: Determining
Which Customer Needs to
• HavingSatisfy
close interactions with current and potential
customers helps a firm identify the targeted customer
group’s current and future needs that its products can
satisfy.
• In a general sense, needs (what) are related to a product’s
benefits and features.
• Successful firms:
• Learn how to deliver to customers what they want, when they
want it
• Recognize that consumer needs change
• Firms that fail to do this may lose their customers to competitors
whose products provide more value.
4-1e How: Determining Core
Competencies Necessary to Satisfy
Customer Needs
• A firm must determine how to use its core
competencies in order to implement value-
creating strategies and 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.
• Customers’ expectations can be met and exceeded across time
by only those firms with the capacity to:
• Improve consistently
• Innovate
• Upgrade their competencies
4-2 The Purpose of a
Business-Level Strategy
• The purpose of a business-level strategy is to
create differences between the firm’s position and
those of its competitors.
• To position itself differently from competitors, a firm
must decide if it intends to perform activities
differently or if it will perform different activities.
• Thus, the firm’s business-level strategy is a deliberate choice
about how it will perform the value chain’s primary and support
activities to create unique value.
4-3 Business Models and their
Relationship with Business-Level
Strategies (slide 1 of 3)
• Business models are part of a comprehensive business- level
strategy.
• A business model describes what a firm does to create, deliver,
and capture value for its stakeholders.
• A business model influences the implementation of strategy,
especially in terms of the interdependent processes the firm uses
during implementation.
• Developing and integrating a business model and a business- level
strategy increases the likelihood of company success.
• In essence, a business model is a framework for how the firm will use
processes to create, deliver, and capture value, while a business-level
strategy is the path the firm will follow to gain a competitive
advantage by exploiting its core competencies in a specific product
market.
4-3 Business Models and their
Relationship with Business-Level
Strategies (slide 2 of 3)
• There are many types of business models,
including:
• The franchise model
• A firm licenses its trademark and the processes it follows to
create and deliver a product to franchisees.
• Example: McDonald’s
• The freemium model
• The firm provides a basic product to customers for free and
earns revenues and profits by selling a premium version of the
service.
• Example: Dropbox
4-3 Business Models and their
Relationship with Business-Level
Strategies (slide 3 of 3)
• The advertising model
• For a fee, a firm provides advertisers with high-quality access to
its target customers.
• Example: Google
• The subscription model
• A firm offers a product to customers on a regular basis such
as once-per-month, once-per-year, or upon demand.
• Example: Netflix
• The peer-to-peer model
• A business matches those wanting a particular service with
those providing that service.
• Example: Airbnb
4-4 Types of Business-
Level Strategies (slide 1 of
2)
• Firms choose between five business-level strategies to establish and
defend their desired strategic position against competitors:
1. Cost leadership
2. Differentiation
3. Focused cost leadership
4. Focused differentiation
5. Integrated cost leadership/differentiation
• Each business-level strategy can help the firm establish and exploit a
competitive advantage (either lowest cost or distinctiveness) as the basis
for how it will create value for customers within a particular competitive
scope (broad market or narrow market).
Figure 4.1
Five Business-Level Strategies
4-4 Types of Business-
Level Strategies (slide 2 of
2)
• None of the five business-level strategies is inherently or
universally superior to the others.
• The effectiveness of each strategy is contingent on the:
• Opportunities and threats in a firm’s external environment
• Strengths and weaknesses derived from its resource portfolio
• Thus, it is critical for the firm to select a business-level
strategy that represents an effective match between the
opportunities and threats in its external environment and the
strengths of its internal organization based on its core
competencies.
4-4a Cost Leadership Strategy
(slide 1 of 5)
• Firms that effectively use the cost leadership strategy can earn above-
average returns despite the presence of strong competitive forces.
Potential Entrants
• Over time, the efficiency of a cost leader enhances its profit margins,
which in turn creates an entry barrier to potential competitors.
• New entrants must be willing to accept less than average returns until they
gain the experience required to approach the cost leader’s efficiency.
Product Substitutes
• When faced with product substitutes, the cost leader has more
flexibility than do its competitors.
• To retain customers, it often can reduce its product’s price.
4-4a Cost Leadership Strategy
(slide 5 of 5)
Potential Entrants
• Substantial barriers to potential entrants are created by:
• Customer loyalty
• The need to overcome the uniqueness of a differentiated product
Product Substitutes
• Companies selling brand-name products to loyal customers face a lower
probability of customers switching to substitute products.
4-4b Differentiation Strategy (slide 6 of 6)