SELECTING BUSINESS STRATEGIES

Module 6: Selecting Business-Level

Strategies
• 6.1 Introduction
• 6.2 Understanding Business-Level Strategy through
“Generic Strategies”
• 6.3 Cost Leadership
• 6.4 Differentiation
• 6.5 Focused Cost Leadership and Focused
Differentiation
• 6.6 Best-Cost Strategy
• 6.7 Stuck in the Middle
• 6.8 Conclusion
 Learning Objectives
• After reading covering this module , you should be able to
understand and articulate answers to the following questions:
• 1. Why is an examination of generic strategies valuable?
• 2. What are the four main generic strategies?
• 3. What is a best-cost strategy?
• 4. What does it mean to be “stuck in the middle”?
 Introduction
• Within the strategic management framework, an organization must define
and continue to improve its generic, business-level strategy. A generic,
business-level strategy is also called its generic competitive strategy
because it defines how a firm competes head-to-head against similar
products and services in the marketplace.
• According to Michael Porter, a firm may pursue one of five
generic/competitive business-level strategies. These are:
1. Broad Cost Leadership,
2. Broad Differentiation,
3. Focused Cost Leadership,
4. Focused Differentiation, And
5. Best Cost Strategies.
• An important point of distinction is that business-level strategies are viewed
from the perspective of which consumer(s) are being targeted.
Generic Business Strategy
 Generic Business Strategy
• There are two primary decisions in a generic business strategy.
1. Will the intent of the strategy be on a broad or focused target audience,
and simultaneously,
2. does the firm organize around a cost or differentiation approach?
• If selecting a broad cost leadership or broad differentiation strategy, the
target market for the product or service is broad, meaning most people who
buy within that industry.
• If the strategy is focused, that target market is narrow, a niche market, and
not meant for most people in the industry.
 Generic Business Strategy
• A strategy of broad cost leadership offers the lowest price in the market for
that product or service. It appeals particularly to price-sensitive customers.
• If the strategy is focused on narrow cost leadership, then the firm attempts
to provide the lowest cost to a narrow, niche target market.
• Firms pursuing a broad differentiation strategy offer something unique that
differentiates their product or service from others. Typically this uniqueness
adds cost and value to the product or service, allowing the company to
charge more.
• Focused (narrow) differentiation provides unique or differentiated products
or services to a narrow, niche target market.
 Generic Business Strategy
• The fifth generic business-level strategy is called best cost, where the firm
attempts to offer a hybrid of both lower-cost and differentiated products or
services, combining the two basic strategies. A firm pursuing this strategy
must be careful to perform both strategies well, or risk not performing either
well, and therefore becoming “stuck in the middle,” and losing customers to
the competition.
• Once a firm establishes its overall generic business-level strategy, the
strategic management process helps the firm to continuously improve upon
that strategy. The organizational performance, external, and internal
assessments, and the development of the strategic issue(s) through the
SWOT analysis are then used to plot strategies for the firm to achieve its
vision through its business-level strategy.
 Understanding Business-Level Strategy through “Generic
Strategies”
• The solution is to think about business-level strategy in terms of generic
strategies.
• A generic business-level strategy is a general way of positioning a firm
within an industry. Focusing on generic strategies allows executives to
concentrate on the core elements of firms’ business-level strategies. The
most popular set of generic strategies is based on the work of Professor
Michael Porter of the Harvard Business School and subsequent researchers
that have built on Porter’s initial ideas
 Firms Source Of Competition
• Firms compete on two general dimensions—
1. The source of competitive advantage (cost or differentiation)
2. The scope of operations (broad or narrow).
• Four possible generic business-level strategies emerge from these decisions.
An example of each generic business-level strategy from the retail industry
is illustrated in the next slide.
 Business-Level Strategies
1. Competitive Advantage: Cost
1. Broad Target Market: Walmart’s cost
leadership strategy depends on
attracting a large customer base and
keeping prices low by buying massive
quantities of goods from suppliers.
2. Narrow Target Market: In using a focused
cost leadership, Dollar General does not
offer a full array of consumer goods, but
those that it does offer are priced to
move.
 [Link] Advantage:
Differentiation
1. Broad Target Market: Nordstrom builds its differentiation strategy around
offering designer merchandise and providing exceptional service.
2. Narrow Target Market: Anthropologie follows a focused differentiation
strategy by selling unique (and pricey) women’s apparel, accessories, and
home furnishings.
 Key Takeaway
• Business-level strategies examine how firms compete in a
given industry. Firms derive such strategies by executives
making decisions about whether their source of
competitive advantage is based on price or differentiation
and whether their scope of operations targets a broad or
narrow market.
 Exercises

• 1. What are examples of each generic business-level

strategy in the apparel industry?
• 2. Create a new framework to examine generic
strategies using different dimensions than the two
offered by Porter’s framework. What does your
approach offer that Porter’s does not?
Best-Cost strategy
As a concept, Best-Cost means high quality and low price of a product. This
term is used to indicate a situation where the company tries to achieve the
best (lowest) cost relative to the competitors who offer similar products and
simultaneously tries to improve quality.
Best-Cost strategy
The best-cost strategy is the strategy of increasing the quality of
products while reducing costs. This strategy is applied to give
customers “more value for the money.”

It is achieved by satisfying customers’ expectations on key

attributes of products. At the same time, prices are charged lower
than the competitors.

By following the best-cost strategy, the company attempts to attract

the ‘value-conscious buyers’ (those buyers who want a superior
product at a lower price).
Best-Cost strategy
This strategy is a hybrid. It balances a strategic emphasis on low-
cost against a strategic emphasis on differentiation which is
understandable.
It is considered as the most powerful competitive strategy of all. It
presupposes ‘relentlessly striving to become a lower-and-lower cost
provider of a higher-and-higher caliber product.’ Toyota Company of
Japan followed the best-cost strategy for its Lexus cars to beat
Mercedes-Benz and BMW cars
 Stuck in the Middle
• A firm is said to be stuck in the middle if it does not offer features that are
unique enough to convince customers to buy its offerings and its prices are
too high to effectively compete based on price. Firms that are stuck in the
middle generally perform poorly because they lack a clear market or
competitive pricing.
 Reasons for stucking in the middle
1. Doing everything means doing nothing well
• Michael Porter has noted that strategy is as much about executives deciding
what a firm is not going to do as it is about deciding what the firm is going to
do (Porter, 1996). In other words, a firm’s business-level strategy should not
involve trying to serve the varied needs of different segments of customers
in an industry. No firm could possibly pull this off!!!!
 Reasons for stucking in the middle
2. Getting outmaneuvered by competitors
• In many cases, firms become stuck in the middle not because executives fail
to arrive at a well-defined strategy but because firms are simply
outmaneuvered by their rivals.
 Key Takeaway
• When executing a business-level strategy, a firm
must not become stuck in the middle between
viable generic business-level strategies by
neither offering unique features nor competitive
pricing.
• Excellent firms normally implement the best cost
strategy
 Exercises
• 1. What is an example of a firm that you would consider
to be “stuck in the middle”? What would your advice be
to the executives in charge of this firm?
• 2. Research a company that has gone bankrupt or
otherwise stopped operations in the past decade
because its strategy was “stuck in the middle” of
otherwise viable generic business-level strategies.
Could its demise have been prevented?
• 1. What is an example of a firm that you would consider
to be “using the best cost strategy?