BHMS4251

Business Policy & Strategy

Business Level Strategies

Subject Lecturer: Dr Zulfiqar Ali

Meeting 8
Lecture Learning Outcomes
n To consider the three generic strategies, overall cost
leadership, differentiation, and focus
n To examine how the successful attainment of generic
strategies can improve a firm’s relative power vis-à-vis
the five forces that determine an industry’s average
profitability
n To consider using a more dynamic approach of
competitive strategy in a marketplace – blue ocean
strategy.

L8-2
Overall Flow for Strategic Management Process

External analysis
(General - PESTEL & competitive
environments – 5 forces) Intended Strategies (L2)
Vision -Identify opportunities & threats
(Lecture 3) Functional-level S. (L7)
Mission SWOT analysis Strategic Issues
(Lecture 6) (Lecture 6) Business-level S. (L8)
Objectives
(Lecture 2) Internal analysis Corporate-level S. (L9)
(VRIN framework – L4, value chain
Analysis – L5, corporate culture – L6,
performance evaluation)
- Identify strengths & weaknesses

Competitive advantages
(Lectures 1 & 6)

L8-3
Hierarchy of Strategies

Corporate-level Strategy

Business-Level Strategy

Functional-level Strategy

L8-4
Hierarchy of Strategies
n Corporate Strategies
n These strategies are established at the highest levels of
management and involve a long-range time horizon.
n Business Strategies
n Business strategies focus on how to compete in a given
business.
n Narrower in scope than a corporate strategy, business strategy
generally applies to a single business unit.
n Functional Strategies
n Narrower in scope than business strategies and deal with the
activities of the functional areas – production, finance,
marketing, personnel, and the like.
n Functional strategies must support business strategies, but
they are mainly concerned with “how to” issues.
L7-5
L8-6
Three Generic Strategies
Competitive Advantage
Uniqueness Perceived Low cost Position
by the Customers
Industrywide
Strategic
Target

Breadth of
target
market
Particular
Segment Only

L8-7
6-7
Three Generic Strategies
(Michael Porter)

Three generic strategiesà Outperform rivals

1. Overall cost leadership
• Low-cost-position relative to a firm’s peers
• Manage relationships throughout the entire
value chain

L8-8
6-8
Three Generic Strategies (cont.)
(Michael Porter)
2. Differentiation
• Create products and/or
services that are unique and
valued
• Non-price attributes for which
customers will pay a premium
3. Focus strategy
• Narrow product lines, buyer
segments, or targeted
geographic markets
• Attain advantages either
through differentiation or cost
leadership 6-9
Combining Porter’s Generic Competitive
Strategies and Competitive Advantages

Differentiation Position

Low High
Cost Position

Low Pure Cost Cost & Differentiation

High No Competitive Advantage Pure Differentiation

L8-10
Profit/Cost Distribution

Average Profit
price
Profit Profit
Costs
Costs
Costs
Average Player Cost based Differentiator

L8-11
Gordon Ramsay

L9-12
Generic Strategies: Competitive Advantage
Cost
1- Overall Cost Leadership

Strategic
Target
Broad
n Integrated tactics
n Aggressive construction of efficient-scale facilities
n Vigorous pursuit of cost reductions from experience
n Tight cost and overhead control
n Avoidance of marginal customer accounts
n Cost minimization in all activities in the firm’s value chain,
such as R&D, service, sales force, and advertising
n Example: Wal-Mart invested in advanced technology throughout its
operations – it uses online systems to order goods from suppliers and
manage inventories, it equips its stores with cutting-edge sales-tracking
and checkout systems, and it sends daily point-of-sale data to 4,000
vendors.
L8-13
6-13
1- Overall Cost Leadership (Cont.)
nExperience Curve

n How business “learns” to lower costs as

it gains experience with production
processes
n With experience, unit costs of
production decline as output increases
in most industries
n E.g. Boeing – the world’s largest aerospace
company and leading manufacturer of
commercial planes, defense, space and security
systems.
L8-14
6-14
1- Overall Cost Leadership (Cont.)

n A firm following an overall cost leadership position:

n Must attain competitive parity on the basis of
differentiation relative to competitors
n Competitive parity on the basis of differentiation
• Permits a cost leader to translate cost advantages
directly into higher profits than competitors
• Allows firm to earn above-average profits

L8-15
6-15
Overall Cost Leadership: Improving Competitive
Position vis-à-vis the Five Forces

nAn overall low-cost position

n Protects a firm against rivalry from competitors
n Protects a firm against powerful buyers
n Provides more flexibility to cope with demands
from powerful suppliers for input cost increases
n Provides substantial entry barriers from
economies of scale and cost advantages
n Puts the firm in a favorable position with respect
to substitute products
L9-16
6-16
Pitfalls of
Overall Cost Leadership Strategies
n Too much focus on one or a few value-chain activities
n Too often managers make big cuts in operating
expenses, but don’t question year-to-year spending
on capital projects
n Should explore all value-chain activities as
candidates for cost reductions

n All rivals share a common input or raw material

n Vulnerable to price increases

L8-17
6-17
Pitfalls of
Overall Cost Leadership Strategies (Cont.)
n Strategy is imitated too easily

n A lack of parity on differentiation

n To attain advantage, must obtain level of
differentiation (online degree programs)
n Can be achieved by reputation, quality, through
signaling mechanisms
n Erosion of cost advantages when the pricing
information available to customers increases
(Internet)

L8-18
6-18
Generic Strategies: Competitive Advantage
Perceived uniqueness
2- Differentiation

Strategic
Target
Broad
nDifferentiation can take
many forms:
Luxury vehicle segment:
n Prestige or brand image BMW vs Mercedes-Benz

n Technology
n Innovation
n Features
n Customer service
n Dealer network
Power of Brand
https://www.youtube.com/watch?v=4eIDBV4Mpek
L8-19
6-19
Differentiation (Cont.)
nFirms may differentiate along several
dimensions at once

nFirms achieve and sustain differentiation and

above-average profits when price premiums
exceed extra costs of being unique

nRequires integration with all parts of a firm’s

value chain

nImportant aspect is speed or quick response

L8-20
6-20
Differentiation: Improving Competitive Position
vis-à-vis the Five Forces
nDifferentiation provides protection against
rivalry
n Strong brand loyalty
n Lower customer sensitivity to price
nReduced supplier’s power
n Provides higher margins that enable the firm to
deal with supplier power
n Reduces supplier power due to prestige associated
with supplying to highly differentiated products
L8-21
6-21
Differentiation: Improving Competitive Position
vis-à-vis the Five Forces (Cont.)

nCreates higher entry barriers due to customer

loyalty and uniqueness in its products or
services
nReduces buyer power because buyers lack
suitable alternative

nEstablishes customer loyalty and hence less

threat from substitutes

L8-22
6-22
Types of Differentiation Themes
n Multiple features – Microsoft Windows and Office
n Wide selection and one-stop shopping –Amazon.com and
Taobao.com
n Superior service – FedEx
n Spare parts availability – Caterpillar
n Engineering design and performance
– Mercedes and BMW
n Prestige – Rolex
n Product reliability – Johnson & Johnson
n Complete line of products – Campbell’s
23
n Top-of-line image – Ralph Lauren
Potential Pitfalls of
Differentiation Strategies
n Uniqueness that is not valuable
n Must be unique and possess high customer value

n Too much differentiation

n Firms may strive for too much quality

n Too high a price premium

n Customers may desire product, but repelled by
price

L8-24
6-24
Potential Pitfalls of
Differentiation Strategies (Cont.)
n Differentiation that is easily imitated (New menus or
foods in the fast food restaurants)
n Dilution of brand identification through product-line
extensions (Gucci)
n Increase short-term revenues,
detrimental in long run
n Perceptions of differentiation may vary between
buyers and sellers
n “Beauty is in the eye of the beholder”
n IKEA’s lifestyle appeal and contemporary design
L8-25
6-25
Generic Strategies:
3-Focus (or Market Niche) Strategies

nFocus is based on the choice of a narrow

competitive scope within an industry

n Firmselects a segment or group of

segments (niche) and tailors its strategy to
serve them

n Firmachieves competitive advantages by

dedicating itself to these segments
exclusively
L8-26
6-26
Focus (Cont.)
nTwo variants
n Cost focus
• Strives to create a cost advantage in its target segment
• Haier’s washing machine for suburban areas in China
n Differentiation focus
• Seeks differentiate in target market
• Ferrari markets its 1,500 cars sold in North America each year to a
list of just 20,000 highly affluent car enthusiasts. Only the highest
echelon of this exclusive group were contacted by Ferrari for a
chance to put their names on the waiting list for one of the 20 $1.1
million FXX models planned for sale in North America.
n Both rely on providing better service than broad-based
competitors who are trying to serve the focuser’s
target segment L9-27
6-27
Examples of Focus Strategies
nHermes Bag
n Kelly’s bag
nLamborghini
n Sports cars

28
Risks of a Focus Strategy
n Competitors find effective ways to match a focuser’s
capabilities in serving niche

n Niche buyers’ preferences shift towards product

attributes desired by majority of buyers - niche
becomes part of overall market

n Segment becomes so attractive it becomes crowded

with rivals, causing segment profits to be splintered
(split up)

L8-29
Focus: Improving Competitive
Position vis-à-vis the Five Forces
n Creates higher entry barriers n provide higher
of either cost leadership or margins that enable
differentiation or both the firm to deal with
supplier power
n Used to select niches that are
least vulnerable to n Reduces buyer
substitutes or where power because the
competitors are weakest firm provides
specialized products
or services

30
Combination/Hybrid Strategies: Integrating
Overall Low Cost and Differentiation
n Two types of value to customers
n Differentiated attributes
• High quality, brand identification, reputation
n Lower prices
n Must avoid being “stuck in the middle” Another option:
n Lack of strategic focus à No CA
Hybrid strategy
n Successful case: Apple
• It had historically had the best margins, partly because of its simpler
product line, leading to lower manufacturing costs.
• Also apple had been outsourcing manufacturing and final assembly to its
Asian partners, paying close attention to scheduling and quality issues.
• On the other hand, it is able to maintain a competitive edge from
innovative product design, leading to a charge of a premium price of its
products. L8-31
6-31
Features of Cost Leadership and
Differentiation Strategies
Generic Key strategy elements Resource and organisational
strategy requirements
Cost • Scale-efficient plants • Access to capital
leadership • Design for manufacture • Process engineering skills
• Control of overheads and R&D •Tight cost control
• Process innovation • Specialization of jobs and functions
• Outsourcing (especially • Incentives linked to quantitative
overseas) target
Differen- • Emphasis on branding • Marketing abilities
advertising, design, service, • Product engineering skills
tiation quality, and new product
• Cross-functional coordination
development
• Creativity
• Research capability
• Incentives linked to qualitative
performance targets
Source: Grant, R.M. (2008), Contemporary Strategy Analysis, 6th ed., Blackwell Publication,
Malden, MA L8-32
Combination/Hybrid Strategies: Improving
Competitive Position vis-à-vis the Five Forces

nObtain advantages of competition from both

approaches

n High entry barriers

n Bargaining power over suppliers
n Reduces power of buyers (fewer competitors)
n Value position reduces threat from substitute
products
n Reduces the possibility of head-to-head rivalry

L8-33
6-33
Blue Ocean Strategy
(Move beyond conventional industry analysis)

n Market boundaries and industry structure are not

fixed, industry players have to use a blue ocean view
to reconstruct the industry, not through competition
but by creating a new market where there is no
competitor.
n The competition therefore becomes irrelevant.

References:
n Sola, D. & Couturier, J. (2014). How to Think Strategically: Your Roadmap to Innovation and Results, Edinburge, UK: Pearson
Education Limited, Financial Times Publishing, 166-170.
n Kim, W. C., & Mauborgne, R. (2004). Blue ocean strategy. Harvard Business Review, October, 71-80.
n Kim, W. C., & Mauborgne, R. (2005). Blue ocean strategy. California management review, 47(3), 105-121.
n Wee, C. H. (2017). Think tank—beyond the five forces model and blue ocean strategy: an integrative perspective from Sun Zi
Bingfa. Global Business and Organizational Excellence, 36(2), 34-45.

L8-34
Differences between Blue Ocean and
Red Ocean
• Red ocean represent all the industries in existence today, or the known market
space.
• Blue ocean denote all the industries not in existence today, or the unknown market
space.

Blue Ocean Red Ocean

• Create uncontested market space • Compete in existing market space
• Make the competition irrelevant • Beat the competition
• Create and capture new demand • Exploit existing demand
• Break the value/cost trade-off • Make the value/cost trade-off
• Align the whole system of a • Align the whole system of a
company’s activities in pursuit of company’s activities with its
differentiation and low cost strategic choice of differentiation or
low cost
• Set up the rules of “the game” • Accept existing rules of “the game”
Source: Kim and Mauborgne (2004, p.76) 35
Blue Ocean Examples

n This Marvel began as a typical comic

book publisher in 1939, focusing
primarily on young readers. Then, as
its focus shifted to college students,
Marvel began to develop more
complex characters. Superheroes
came second to being people. Marvel
generated a new value and used the
blue ocean strategy advantages at full
throttle.
n By introducing the Multiverse, Marvel
dived into a clear ocean, as diverse
characters were connected and
brought together in various movies. As
a result, Marvel became the comic
book company number one in the US.

L8-36
Blue Ocean Examples

n In the early 2010s, a computer games giant,

Nintendo, faced fierce competition. The
industry giants like Sony and Microsoft
occupied the market. Nintendo realized the
importance of blue ocean strategy, as it
succeeded with it earlier with their hit, Wii.
That is why they again turned to the blue
ocean and launched the Switch, one of the
world's fastest-selling game consoles.
n The Switch is a hybrid video game console
consisting of a tablet that can be docked as
a home console or a portable device. It
contains wireless controllers that can be
attached to either side of the console and
held in hand like the Wii Remote. Therefore,
both kids and their parents adored the
Switch.
n By expanding into adjacent sectors and
collaborating with companies, Nintendo
entered history.

L8-37
Blue Ocean Examples

n In 2003, Apple uncovered a

vast, blue ocean market for
digital music providing free,
convenient, and legal song
downloads in iTunes.
n Furthermore, it allowed users
to purchase individual songs
for affordable prices.
Previously, they had to buy a
whole CD if they wanted only
one or two pieces. Now iTunes
has 99 million subscribers
worldwide, having
implemented the best of a blue
ocean strategy.

L8-38
Blue Ocean Examples

n Facebook's CEO, Mark

Zuckerberg, presented Meta at
Connect 2021. The concept
promised to unify apps and
technologies under a new
company identity. A clear Blue
Ocean Shift has occurred.
n According to Facebook, the
Metaverse will seem like a
combination of today's online
social encounters projected
into the real world. It will allow
immersive experiences with
others and carry out activities
impossible in the real world.

L8-39
Blue Ocean Examples

n Uber denied competing with taxi

companies and developed an
app that instantly connects
customers and drivers.
n At that time, there was already a
sizable demand for upmarket
on-demand transportation.
Luxury automobile services
dominated that market, but no
app existed for them. Uber took
advantage of an existing market,
creating their blue ocean
strategy. They strategically
valued differentiation over
affordability, maintaining the
current value-cost trade-off.

L8-40
 The Simultaneous Pursuit of
Differentiation & Low Cost
n A blue ocean is created in the region where a company’s actions
favorably affect both its cost structure and its value proposition
to buyers.
n Cost savings are made from eliminating and reducing the factors
an industry competes on.
Costs
n Buyer value is lifted by raising and
creating elements the industry has never
offered.
n Over time, costs are reduced further as Blue Ocean
scale economies kick in, due to the high
sales volumes that superior value
generates.
Buyer Value
Source: Kim and Mauborgne (2004, p.77) L8-41
Creating a Blue Ocean
- The Four Actions Framework

L8-42
Lecture Summary
nBusiness-Level Strategies
n Overall cost leadership, differentiation, focused
strategies
n Combination/hybrid strategies
n Improving competitive position vis-à-vis the five
forces
n Blue Ocean strategy

L9-43