Strategic Management

Part II: Strategic Actions:

Strategy Formulation
Chapter 4: Business-Level Strategy

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The Strategic Management Process

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Chapter 4: Business-Level Strategy

• Overview: Five content areas

– Defining business-level strategy
– Relationship between customers and strategy
– Differences in business-level strategies
– 5-Forces
– Risks of business-level strategies

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 Introduction

• Strategy: Increasingly important to a firm’s

success and concerned with making choices among
two or more alternatives. Choices dictated by
– External environment
– Internal resources, capabilities and core competencies
– Create a match to earn above average returns

• Business level-strategy: Integrated and

coordinated set of commitments and actions the
firm uses to gain a competitive advantage by
exploiting core competencies in specific product
markets

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• Satisfying customers is the foundation of
successful business strategies and answers:
• Who will be served??
• What needs those customers have that will be satisfied??
• How needs will be satisfied??

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Introduction: Developing Relations

• Satisfying customers is the foundation of

successful business strategies
– Managing relationships with customers
– Reach, richness, affiliation
– Who will be served
– What needs will be satisfied
– How those needs will be satisfied
• Five (5) generic business level strategies
– Generic = can be used in any organization competing
in any industry
– Follows the discussion of customers

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Customers: Their Relationship with Business-
Level Strategies

• Strategic competitiveness results when firm can

satisfy customers by using its competitive
advantages
• Returns earned are the lifeblood of firm
• Most successful companies satisfy current
customers and/or meet needs of new customers

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Customers: Their Relationship with Business-
Level Strategies (Cont’d)

• …Five components in customer relationships

– 1. Effectively managing relationships w/ customers
• Deliver superior value
• Leads to customer satisfaction, high level of profitability
• Strong interactive relationships is foundation
• Co-create the value
• Amazon using “Big Data and Collaborative Filtering”

– 2. Reach, richness and affiliation

• Access and connection to customers i.e. Instagram
• Depth and detail of two-way flow of information between firm
and customer
• Facilitating useful interactions with customers i.e. LMO to CCO

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Customers: Their Relationship with Business-
Level Strategies (Cont’d)

• …Five components in customer relationships

– 3. Who: Determining the customers to serve
• Market segmentation
– Dividing customers into groups based on differences in needs
– Process used to cluster people with similar needs into individual and
identifiable groups
– For example, consumer and industrial markets

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Market Segmentation

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Customers: Their Relationship with Business-
Level Strategies (Cont’d)

• …Five components of customer relationships

– 4. What: Determining which customer needs to satisfy
• What = Needs
– Related to a product’s benefits and features
– Buy that creates value (I.e., High-quality? Low price?)
– Customer interaction a way to predict current and future needs
– Changing from product to experience i.e. Starbucks

– 5. How: Determining core competencies necessary to

satisfy customer needs
• Core competencies: resources and capabilities that serve as
source of competitive advantage for firm over its rivals
• How = core competencies
• Upgrade, innovate, invest i.e. R&D

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Chapter 4: Business-Level Strategy

• Overview: Five content areas

– Defining business-level strategy
– Relationship between customers and strategy
– Differences in business-level strategies
– 5-Forces
– Risks of business-level strategies

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Purpose of Business-Level (BL) Strategies

• Purpose: To create differences between position of a

firm and its competitors

• Essence of Business Level Strategy is:

– Perform activities differently (Cost leadership)
– Perform different activities (Differentiation)

• Integration of firm’s Supply Chain activities to create

value
– Southwest’s Airline Activities
– How they are integrated
– Southwest Airline’s activity mapped: 6 strategic intents
– Between Low-Cost and Differentiation is “acceptance”
– US Airways, United Airlines’ Shuttle: Failed to imitate
Southwest Airline

• https://www.youtube.com/watch?v=i1qRX9_tISA

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Southwest Airlines’ Activity System

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Purpose of Business-Level (BL) Strategies (con’t)

• Two types of competitive advantage firms must

choose between
– Cost (Are we LOWER than others?)
– Uniqueness (Are we DIFFERENT? How?)

• Internal resources allow firms to seek

– Cost Competitive Advantage
– Distinctiveness Competitive Advantage

• Two types of ‘competitive scope’ firms must

choose between
– Broad target
– Narrow target
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Five Business-Level Strategies

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Types of Business-Level Strategies

• 1. Cost Leadership (CL)

– Integrated set of actions designed to produce or deliver
goods or services with features that are acceptable to
customers at the lowest cost, relative to competitors
– Features: Standardized Products, Process innovation,
outsourcing costly area/suppliers
– Competitive scope: Broad
– No-frill, standardized goods
– Continuously reduce costs of value chain activities
• Inbound/outbound logistics account for significant cost
– Low-cost position is a valuable defense against rivals

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• Primary Activities as core to reduce cost:
−Outsourcing to low-cost firms
−But do not give suppliers too much power !!!

• Secondary Activities as additional potential to reduce

cost:
−Trained and efficient HR
−Positive inflows and lower expenses
−Technology

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 Examples of Value-Creating Activities
Associated with the Cost Leadership Strategy
 Types of Business-Level Strategies (Cont’d)

• 1. Cost Leadership (CL) (Cont’d)

– Cost leaders are in a position to

• Absorb supplier price increases and relationship demands
• Force suppliers to hold down their prices
– Continuously improving levels of efficiency and cost
reduction
• Can be difficult to replicate and
• serve as significant entry barriers to potential competitors
– Cost leaders hold an attractive position in terms of
product substitutes, with the flexibility to lower prices to
retain customers
– Examples: Wal-Mart

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Wal-Mart as a Cost-Leader

─ USP: Everyday low Prices

─ Large scale purchases both nationally and internationally
─ No supplier accounts for more than 4% of its total buy
─ Very thin margins resulting in high sales
─ Cellular communication networks for shared intelligence
─ Three supply chain principles:
1. Work Directly with manufacturers
2. Strategic Long-term relationship
3. Engage in high volume purchase

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Types of Business-Level Strategies (Cont’d)

• 1. Cost Leadership (CL) (Cont’d)

– In relationship to the 5 Forces:

• Rivalry against existing competitors: Rivals hesitate to
compete on the basis of price
• Bargaining Power of Buyers (Customers)
• Bargaining Power of Suppliers
• Potential Entrants
• Product Substitutes

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1. Rivalry with Existing Competitors:
• Hesitate to compete on price basis
• Size and resources, dependence on market, location etc

2. Bargaining Power of Buyers:

•Customers can force to reduce prices but to limits
•Force to provide innovative services and products

3. Bargaining Power of Suppliers:

•Cost leader operates with greater margins by keeping cost lower
•Force to reduce the supplier’s margins

4. Potential Entrants:
•Requires huge Capital and market relations
•Efficiencies required to match the cost level
•Brand image

5. Product Substitutes:
•To retain, reduce the prices
•Increase customer experience by keeping the prices lower

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Types of Business-Level Strategies (Cont’d)

• Competitive Risks of the cost leadership strategy

– Cost-Leadership strategy is not risk-free
– Source of cost advantage becomes obsolete
– Focus on cost may cause the firm to overlook important
customer preferences i.e. Wal-Mart being criticized
– Do not forget “minimal accepted level of services”
– Imitation
– Aldi failed Wal-Mart in Germany
• https://www.youtube.com/watch?v=PxtXI0K4YJs

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Types of Business-Level Strategies (Cont’d)

• 2. Differentiation
– Integrated set of actions designed by a firm to produce
or deliver goods or services at an acceptable cost that
customers perceive as being different in ways that are
important to them
– Competitive advantage: Differentiation
– Competitive scope: Broad
– “Product innovation” as a new life
– Customized products – differentiating on as many
features as possible
– Examples: Lexus providing superior product reliability,
durability and high performance sound system

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Types of Business-Level Strategies (Cont’d)

• 2. Differentiation
– Integrated set of actions designed by a firm to produce
or deliver goods or services at an acceptable cost that
customers perceive as being different in ways that are
important to them
– Competitive advantage: Differentiation
– Competitive scope: Broad
– “Product innovation” as a new life
– Customized products – differentiating on as many
features as possible
– Examples: Lexus providing superior product reliability,
durability and high performance sound system

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• Compliments to differentiation strategy:
−Continuous upgradation/innovation
−Change product lines/portfolios
−Less similarity between products
−Responsive customer services

• Apple sets the standards high

• Armour “developing a digital ecosystem”
 Examples of Value-Creating Activities
Associated with the Differentiation Strategy
Types of Business-Level Strategies (Cont’d)

• 2. Differentiation (Cont’d)

– In relationship to the 5 Forces:

• Rivalry against existing competitors
– Customers are loyal purchasers of differentiated products
– I.e., Apple
• Bargaining Power of Buyers (Customers)
– Customers are willing to pay for distinctive features
– Inverse relationship between loyalty/product: As loyalty increases,
price sensitivity decreases
– I.e., Apple, Toyota Lexus etc
• Bargaining Power of Suppliers
– Relatively high dependence on suppliers
– Provide high quality components, driving up firm’s costs
– Cost may be passed on to customer
• Differentiation (Cont’d)

– In relationship to the 5 Forces:

• Potential Entrants
– Loyalty and need to overcome uniqueness is hard to beat
– Substantial barriers (see above) and would require significant resource
investment and patience

• Product Substitutes
– Customer loyalty effectively positions firm against product substitutes
– Apple Customers

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Types of Business-Level Strategies (Cont’d)

• Competitive Risks of the differentiation strategy

– Customers determine that the cost of differentiation is
too great
– The means of differentiation may cease to provide value
for which customers are willing to pay due to imitation
at lower prices
– Experience can narrow customers’ perceptions of the
value of a product’s differentiated features i.e. Kleenex
Facial wipes against regular tissue
– Counterfeiting products creating distrust

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Types of Business-Level Strategies (Cont’d)

• There are two “Focus” strategies

– In general, the firms’ core competencies used to serve
the need of a particular industry segment or niche to
the exclusion of others.
• May lack resources to compete in the broader market
• May be able to more effectively serve a narrow market
segment than larger industry-wide competitors
• Firms may direct resources to certain value chain activities to
build competitive advantage
– Large firms may overlook small niches

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Types of Business-Level Strategies (Cont’d)

• Focus strategy examples

– Buyer groups
• Youths/senior citizens
– Product line segments
• Professional painter groups
– Geographic markets
• West vs. East coast

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Types of Business-Level Strategies (Cont’d)

• 3. Focused Cost Leadership

– Competitive advantage: Low-cost
– Competitive scope: Narrow industry segment

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Types of Business-Level Strategies (Cont’d)

• 4. Focused Differentiation
– Competitive advantage: Differentiation
– Competitive scope: Narrow industry segment
• i.e., in the outdoor recreation business a firm that caters to fly
fishing is following a focused differentiation strategy (as
opposed to discount stores that carry general fishing gear)
– High quality equipment
– Knowledgeable personnel
– Guided tours
– Fly tying classes

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Types of Business-Level Strategies (Cont’d)

• Risk of using “Focus” strategies

– A competitor may be able to focus on a more narrowly
defined competitive segment and "outfocus” the focuser
– A company competing on an industry-wide basis may
decide that the market segment served by the focus
strategy firm is attractive and worthy of competitive
pursuit
– Customer needs within a narrow competitive segment
may become more similar to those of industry-wide
customers as a whole

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Types of Business-Level Strategies (Cont’d)

• 5. Integrated CL/Differentiation
– Efficiently produce products with differentiated
attributes
• Efficiency: Sources of low cost
• Differentiation: Source of unique value
– Can adapt to new technology and rapid changes in
external environment
– Simultaneously concentrate on TWO sources of
competitive advantage: cost and differentiation –
consequently…
– …must be competent in many of the primary and
support activities
– Three sources of flexibility useful for this strategy

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Types of Business-Level Strategies (Cont’d)

• Three flexible sources include

– Flexible manufacturing systems (FMS)
• Computer controlled process used to produce a variety of
products in moderate, flexible quantities with a minimum of
manual intervention
• Goal: eliminate ‘low cost vs. product variety, tradeoff inherent
in traditional manufacturing technologies
– Information networks
• Using technology to link suppliers, distributors and customers
– Total Quality Management (TQM) systems
• Emphasizes firm’s total commitment to the customer and
continuous improvement of every process through data-
driven, problem-solving approaches based on empowering
employees

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Types of Business-Level Strategies (Cont’d)

• Competitive Risks of Integrated Strategies

– Although becoming more popular the RISK is getting
‘stuck in the middle’
• Cost structure is not low enough for attractive pricing of
products and products not sufficiently differentiated to create
value for target customer – therefore, fail to successfully
implement either low cost or differentiation strategy
• Result: Don’t earn above-average returns

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