Chapter 4:

BUSINESS-LEVEL STRATEGY

(chapter 5 in the textbook)

“I surf to where hockey balls

will be there….

not where it has to roll over.”

- Wayne Gretsky
2

Strategic model

Company Environ-
ment

4 levels of strategy
• Function-level strategy
Strategy • Business-level strategy
• Corporate-level strategy
• International strategy

Business Strategy - BUSN 162 1

 Business-level strategy
Business--level strategy
Business 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

Strategy makes following decisions:

1. Customer’s needs–
WHAT needs will be satisfied?
2. Customer groups
WHO will be served?
3. Distinctive competencies
HOW will those needs be satisfied?

These decisions determine which strategies will

be formulated and implemented to put a business
model into operation.

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

Identify customer groups and market segments

Business Strategy - BUSN 162 2

 Three approaches for segmentation

What: Determining Which Customer Needs to Satisfy

Customer needs are related to a product’s

benefits and features.
A firm’s ability to meet customer needs
creates VALUE for the customer.
Two forms of value:
Low cost
Unique, or differentiated product

5-8 8

How: Determining Core Competencies Necessary to

Satisfy Customer Needs

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.

Business Strategy - BUSN 162 3

 The Purpose of a Business-Level Strategy

Business-Level Strategies
• Are intended to create differences between the
firm’s position relative to those of its rivals.

To position itself, the firm must decide whether

it intends to:
• Perform activities differently or
• Perform different activities as compared to its
rivals.

10

Two Choices for Business Level Strategies

Types of potential competitive advantage

• Achieving lower overall costs than rivals
• Possessing the capability to differentiate the firm’s
product or service and command a premium price

Types of competitive scope

• Broad scope
• Narrow scope

11

Generic Business Level Strategies

Source of Competitive Advantage

Cost Differentiation

Broad Cost Leadership Differentiation

Target
Market Integrated Cost
Breadth of
Competitive Leadership/
Scope Differentiation
Narrow Focused Cost Focused
Target
Leadership Differentiation
Market

12

Business Strategy - BUSN 162 4

 Cost Leadership Strategy

13

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 with features that
are acceptable to customers.
• Relatively standardized products
• Features acceptable to many customers
• Lowest competitive price

14

Cost Leadership Strategy

Cost saving actions required by this strategy:

building efficient scale facilities
tightly controlling production costs and
overhead
minimizing costs of sales, R&D and service
building efficient manufacturing facilities
monitoring costs of activities provided by
outsiders
simplifying production processes

15

Business Strategy - BUSN 162 5

 How to Obtain a Cost Advantage

Determine and Reconfigure, if

control needed

Cost Drivers Value Chain

• Alter production process • New raw material

• Change in automation • Forward integration
• New distribution channel • Backward integration
• New advertising media • Change location
• Direct sales in place of relative to suppliers or
indirect sales buyers
16

Factors That Drive Costs

Economies of scale Product features

Asset utilization Performance
Capacity utilization Mix & variety of
pattern products
• Seasonal, cyclical Service levels
Interrelationships Small vs. large buyers
Order processing Process technology
and distribution Wage levels
Value chain linkages Product features
• Advertising & sales Hiring, training,
• Logistics & motivation
operations

17

Cost Leadership Value Chain

SOURCE: Adapted
with the permission
of The Free Press, an
imprint of Simon &
Schuster Adult
Publishing Group,
from Competitive
Advantage: Creating
and Sustaining
Superior
Performance, by
Michael E. Porter,
47. Copyright ©
1985, 1998 by
Michael E. Porter.

18

Business Strategy - BUSN 162 6

 Cost Leadership Strategy: Competitors

Rivalry with
Existing Competitors Due to cost leader’s
advantageous position
Threat of new rivals hesitate to
entrants compete on basis of
Rivalry
Bargaining
price.
among
power of
competing
firms
suppliers Lack of price competition
leads to greater profits.
Threat of Bargaining
substitute power of
products buyers

19

Cost Leadership Strategy: Buyers

Bargaining Power Customers already value

of Buyers firm’s low-price position
Can mitigate buyers’
Threat of new
entrants
power by:
Driving prices far below
Rivalry
Bargaining
competitors, causing
among them to exit, thus shifting
power of
competing
firms
suppliers power with buyers back
to the firm.
Threat of Bargaining
substitute power of
products buyers

20

Cost Leadership Strategy: Suppliers

Bargaining Power Can mitigate suppliers’

of Suppliers power by:
Being able to absorb cost
Threat of new
entrants
increases due to low cost
position.
Rivalry
among Bargaining Being able to make very
power of
competing large purchases,
suppliers
firms
reducing chance of
Threat of Bargaining
supplier using power.
substitute power of
products buyers

21

Business Strategy - BUSN 162 7

 Cost Leadership Strategy: New Entrants

The Threat of
Potential Entrants
Can frighten off
new entrants due
Threat of new to:
entrants
Their need to enter
Rivalry
among Bargaining
power of
on a large scale in
competing
firms
suppliers order to be cost
competitive.
Threat of Bargaining
substitute power of The time it takes to
products buyers
move down the
learning curve.

22

Cost Leadership Strategy: Substitutes

Product Cost leader is well
Substitutes positioned to lower
prices in order to
Threat of new
entrants maintain value
Rivalry
position.
among Bargaining
power of
competing
firms
suppliers Need to be aware of
disruptive technology
Threat of
substitute
Bargaining
power of
or other non-
products buyers traditional
substitutes.

23

Major Risks of Cost Leadership 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.

24

Business Strategy - BUSN 162 8

 Differentiation Strategy

25

Differentiation Strategy
An integrated set of actions taken to produce
goods or services (at an acceptable cost) that
customers perceive as being different in ways
that are important to them.
• Focus is on nonstandardized products
• Appropriate when customers value differentiated
features more than they value low cost.

26

Potential Aspects of Differentiation

Superior quality
Unusual or unique features
More responsive customer
service
Rapid product innovation
Advanced technological
features
Image of prestige or status

27

Business Strategy - BUSN 162 9

 Differentiation Strategy

Internal Success in Differentiation::

Establishing the importance of quality
Accuracy, speed and responsiveness
Understanding and meeting customers’
unique preferences

28

How to Obtain a Differentiation Advantage

Control if needed Reconfigure to

maximize

Cost Drivers Value Chain

• Lower buyers’ costs

• Raise performance of product or service
• Create sustainability through:
- customer perceptions of uniqueness
- customer reluctance to switch to non-
non-unique product

29

Differentiation Value Chain

SOURCE: Adapted with

the permission of The
Free Press, an imprint of
Simon & Schuster Adult
Publishing Group, from
Competitive Advantage:
Creating and Sustaining
Superior Performance,
by Michael E. Porter, 47.
Copyright © 1985, 1998
by Michael E. Porter.

30

Business Strategy - BUSN 162 10

 Differentiation Strategy: Competitors

Rivalry with
Competitors Defends against
competitors because brand
Threat of new
entrants
loyalty to differentiated
product offsets price
Rivalry
among Bargaining competition.
power of
competing
suppliers
firms

Threat of Bargaining
substitute power of
products buyers

31

Differentiation Strategy: Buyers

Bargaining Power Can mitigate buyers’ power

of Buyers because well differentiated
products reduce customer
Threat of new sensitivity to price increases.
entrants

Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

32

Differentiation Strategy: Suppliers

Bargaining Power Can mitigate suppliers’

of Suppliers power by:
Absorbing price increases
Threat of new due to higher margins.
entrants
Passing along higher
Rivalry
among Bargaining supplier prices because
power of
competing
suppliers
buyers are loyal to
firms
differentiated brand.
Threat of Bargaining
substitute power of
products buyers

33

Business Strategy - BUSN 162 11

 Differentiation Strategy: New Entrants

The Threat of Can defend against new

Potential Entrants entrants because:
Customer loyalty is difficult to
Threat of new disrupt.
entrants
New products must be at least
Rivalry
among Bargaining equal to performance of proven
power of
competing
suppliers
products, but offered at lower
firms
prices.
Threat of Bargaining
substitute power of
products buyers

34

Differentiation Strategy: Substitutes

Product
Substitutes Well positioned relative to
substitutes because brand
Threat of new
entrants loyalty to a differentiated
product tends to reduce
Rivalry
among Bargaining
power of
customers’ testing of new
competing
firms suppliers products or switching
brands.
Threat of Bargaining
substitute power of
products buyers

35

Major Risks of a Differentiation Strategy

Customers may decide that the price

differentiation between the differentiator’s
product and the cost leaders price is too
large.

The means of uniqueness may no longer be

valued by customers.

36

Business Strategy - BUSN 162 12

 Focus Strategies

37

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—youths or senior citizens
• Different segment of a product line—professional
craftsmen versus do-it-yourselfers
• Different geographic markets—East coast versus
West coast

38

Focus Strategies

Types of focused strategies

• Focused cost leadership
strategy
• Focused differentiation strategy
Focused strategies are similar
to their counterparts in larger
industry:
• Similar areas of emphasis from
analyzing the Value Chain
• Similar analysis of Porter’s Five
Forces
39

Business Strategy - BUSN 162 13

 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.
40

Competitive Risks of Focus Strategies

A focusing firm may be “outfocused” by its competitors.

A large competitor may set its sights on a firm’s niche
market.
Customer preferences in niche market may change to
more closely resemble those of the broader market.

41

Integrated Strategies

42

Business Strategy - BUSN 162 14

 Integrated Cost Leadership/
Differentiation Strategy

Firms performing value chain activities in

ways that allow them to simultaneously
pursue low cost and differentiation.
A firm that successfully uses an
integrated cost leadership/differentiation
strategy should be in a better position to:
• Adapt quickly to environmental changes.
• Learn new skills and technologies more
quickly.
43

Risks of the Integrated Cost Leadership/

Differentiation Strategy

Often involves compromises

Becoming neither the lowest cost nor the
most differentiated firm.
Becoming “stuck in the middle”
Firm engages in economics such that it
cannot achieve benefit of premium pricing
from differentiation nor cost savings from
cost leadership.

44

Southwest Airlines’s Strategy map

High

Southwest

Other
Airlines

Car
Transport
Low
Price Meals Seat Seat class Hub Friendly Speed Frequent
choices conecti services point-to-
vities point
departure
Source: Kim, W.C. and Maubrorgne (2005) Blue Ocean Strategy, Harvard Business School Publishing Corp.
45

Business Strategy - BUSN 162 15